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MODULE 6 - THE MATHEMATICS OF FINANCE
SIMPLE AND COMPOUND INTEREST
- Interest - the monetary charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR). It is also the amount of money a lender or financial institution receives for lending out money.
- Principal - the amount deposited in a bank or borrowed from a bank.
- Interest rate - the percent used to determine the amount of interest.
- Simple interest - interest paid on the original principal.
FUTURE VALUE OR MATURITY VALUE FORMULA FOR SIMPLE INTEREST
- Loan - A is the total amount to be repaid to the lender; this sum is called the maturity value of the loan.
- Investment - A is the total amount to be repaid to the lender; this sum is called the maturity value of the loan.
COMPOUND INTEREST
- Interest calculated not only on the original principal, but also on any interest that has already been earned.
PRESENT VALUE FORMULA
- Used to determine how much money must be invested today in order for an investment to have a specific value at a future date.
THE RULE OF 72
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
EFFECTIVE INTEREST RATE AND NOMINAL INTEREST RATE
- Effective Interest Rate
- Nominal Interest Rate
CREDIT CARDS AND CONSUMER LOANS
- Credit card - An amount paid in excess of the cash price; it is the cost to the customer for the use of credit.
- Average daily balance method - The most common method of determining finance charges.
ANNUAL PERCENTAGE RATE (APR)
- Also known as Annual Percentage Yield (APY) or True Annual Interest Rate
- The effective annual interest rate on which credit payments are based.
CAR LEASES RESIDUAL VALUE
- The value of the car at the end of the lease term.
- Frequently based on a percent of the manufacturer’s suggested retail price (MSRP) and normally varies between 40% and 60% of the MSRP, depending on the type of lease.
STOCKS, BONDS, AND MUTUAL FUNDS
STOCKSMeasured in shares; a share of stock in a company is a certificate that indicates partial ownership in the company. The owners of the certificates are called stockholders or shareholders. As owners, the stockholders share in the profits or losses of the corporation.
A company may distribute profits to its shareholders in the form of dividends. A dividend is usually expressed as a per-share amount—for example, $0.07 per share.
STOCKSMeasured in shares; a share of stock in a company is a certificate that indicates partial ownership in the company. The owners of the certificates are called stockholders or shareholders. As owners, the stockholders share in the profits or losses of the corporation.
A company may distribute profits to its shareholders in the form of dividends. A dividend is usually expressed as a per-share amount—for example, $0.07 per share.
DEFINITION OF TERMS
- Market value
- Brokerage firm
- Brokers
- Stock exchanges
BONDS
When a corporation issues stock, it is selling part of the company to the stock-holders. When it issues a bond, the corporation is borrowing money from the bondholders; a bondholder lends money to a corporation. Corporations, the federal government, government agencies, states, and cities all issue bonds. These entities need money to operate—for example, to fund the federal deficit, repair roads, or build a new factory—so they borrow money from the public by issuing bonds.
Bonds are usually issued in units of $1000. The price paid for the bond is the face value. The issuer promises to repay the bondholder on a particular day, called the maturity date, at a given rate of interest, called the coupon.
When a corporation issues stock, it is selling part of the company to the stock-holders. When it issues a bond, the corporation is borrowing money from the bondholders; a bondholder lends money to a corporation. Corporations, the federal government, government agencies, states, and cities all issue bonds. These entities need money to operate—for example, to fund the federal deficit, repair roads, or build a new factory—so they borrow money from the public by issuing bonds.
Bonds are usually issued in units of $1000. The price paid for the bond is the face value. The issuer promises to repay the bondholder on a particular day, called the maturity date, at a given rate of interest, called the coupon.
MUTUAL FUNDS
An investment trust is a company whose assets are stocks and bonds. The purpose of these companies is not to manufacture a product but to purchase stocks and bonds with the hope that their value will increase. A mutual fund is an example of an investment trust.
When investors purchase shares in a mutual fund, they are adding their money to a pool along with many other investors. The investments within a mutual fund are called the fund’s portfolio. The investors in a mutual fund share the fund’s profits or losses from the investments in the portfolio.
An advantage of owning shares of a mutual fund is that your money is managed by full-time professionals whose job it is to research and evaluate stocks; you own stocks without having to choose which individual stocks to buy or to decide when to sell them. Another advantage is that by owning shares in the fund, you have purchased shares of stock in many different companies. This diversification helps to reduce some of the risks of investing.
Because a mutual fund owns many different stocks, each share of the fund owns a fractional interest in each of the companies. Each day, the value of a share in the fund, called the net asset value of the fund, or NAV, depends on the performance of the stocks in the fund. It is calculated by the formula on the left.
An investment trust is a company whose assets are stocks and bonds. The purpose of these companies is not to manufacture a product but to purchase stocks and bonds with the hope that their value will increase. A mutual fund is an example of an investment trust.
When investors purchase shares in a mutual fund, they are adding their money to a pool along with many other investors. The investments within a mutual fund are called the fund’s portfolio. The investors in a mutual fund share the fund’s profits or losses from the investments in the portfolio.
An advantage of owning shares of a mutual fund is that your money is managed by full-time professionals whose job it is to research and evaluate stocks; you own stocks without having to choose which individual stocks to buy or to decide when to sell them. Another advantage is that by owning shares in the fund, you have purchased shares of stock in many different companies. This diversification helps to reduce some of the risks of investing.
Because a mutual fund owns many different stocks, each share of the fund owns a fractional interest in each of the companies. Each day, the value of a share in the fund, called the net asset value of the fund, or NAV, depends on the performance of the stocks in the fund. It is calculated by the formula on the left.
TAKEAWAYS
Investors do not decide between stocks and bonds but decide on the proportion of the two in their portfolio. As stocks and bonds come with their own pros and cons, an investor will decide on the proportion according to the desired goals and risk tolerance.
Once decided, the investor then decides on which vehicle to use to implement such asset allocation choices. The investment vehicle can be mutual funds, exchange-traded funds, or individual securities.
There is no single investment channel that is best for any investor. Investments are usually based on four criteria, namely age, income generation, length of time until the money is required, and risk tolerance.
Salazar_MAMWfinalexam_BSCE1B.pdfFINAL EXAM (47/50)
REFLECTION
This module reminded me of my second choice course which is accounting. When I graduated in elementary, I said I want to be an accountant. But as the years pass by, I realize what I really want and where my skills and capabilities are compatible with. Nevertheless, I think that the topics in this module were often discussed in the field of accounting since it discussed all about money transactions. Yet, I am happy to gain knowledge about the matters of the topic knowing that they can help me in the future. I learned how to invest money, how to make my money grow, where to invest my money, and what happens to my money after invested. In addition, I also learned the consequences of having loans. Overall, all the topics of this module are applicable in man's life especially for an aspiring business man in the future.
This module reminded me of my second choice course which is accounting. When I graduated in elementary, I said I want to be an accountant. But as the years pass by, I realize what I really want and where my skills and capabilities are compatible with. Nevertheless, I think that the topics in this module were often discussed in the field of accounting since it discussed all about money transactions. Yet, I am happy to gain knowledge about the matters of the topic knowing that they can help me in the future. I learned how to invest money, how to make my money grow, where to invest my money, and what happens to my money after invested. In addition, I also learned the consequences of having loans. Overall, all the topics of this module are applicable in man's life especially for an aspiring business man in the future.
REFERENCES:
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