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math of finance. NOTES FOR WEEK 1 ? JUNE 02, 2007 I. OVERVIEW OF FINANCE Finance ?
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Submitted by philpangandian on June 18, 2007
Category: Business
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NOTES FOR WEEK 1 – JUNE 02, 2007
I. OVERVIEW OF FINANCE
Finance – is an inter-temporal choice between spending today and spending tomorrow.
Investing – is a productive activity
Productive activity can be classified as:
a. Directly – putting up your own a business.
b. Indirectly - if there is an intermediary assigned to take care of your investments such as banks, investment bankers, etc.
Saver Productive activity
Financial instrument
– Claim on cash flows of a productive activity that is being funded
– Needs computation to value the instrument
Types of Financial Instruments:
Debt Equity
Secured Debt Converting Debt
Unsecured Debt Convertible Preferred
Preferred
Common
Tree Model of Finance
- consider the value of the asset
- expected return/yield of the asset
Cow Model of Finance
- Produce same result regardless of scenarios, also known as cash cow model.
Principle of Finance
1. Price and Rate of Return (R) – manifestation of the value of the asset.
- Price is inversely related to Return
- If the Price is low the rate of Return will be very high
2. Risk - possibility to lose value because of market movement
- The higher the risk, the higher the return that should be asked for
Portfolio Theory - some risks cancel each other out when assets are put together.
II. NUMBERS
1. Real numbers
- everything on the number line
a. Rational numbers – numbers that can be expressed in decimal, which are terminating or repeating.
i. integers – positive integers, zero, negative integers
ii. non-integers
b. Irrational numbers- expressed as non-repeating decimals
e.g.
or...
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