Introduction to Business Finance and Financial Mathematics I ...
FNCE20001 Business Finance Lecture Notes
Introduction to Business Finance and Financial Mathematics I Lecture One -
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Managers should aim to maximise the value of their firm by taking on profitable investments. This results in maximum shareholder wealth Money has time value because of compounded interest In simple interest, the value of a cash flow is calculated without including any accrued interest to the principal In compounded interest, the value of a cash flow is calculated based on the principal and interest accrued The present and future values of a cash flow depend on the time period, the interest rate, and the method of computing interest Nominal interest rate: rate charged more frequently than quoted, e.g. 5% p.a. paid quarterly Effective interest rate: frequency of payment matches quoted rate, e.g. 5% p.a. paid annually Real interest rate: adjusted for inflation Nominal interest rate: unadjusted for inflation
Lecture Two -
Ordinary annuities are periodic, end of the period cash flows Deferred ordinary annuities are periodic, end of the period cash flows that start at a future date Annuities due are periodic, beginning of the month cash flows The future value of an annuity is the sum of the future values of each cash flow compounded at the relevant interest rate The present value of an annuity is the sum of the present values of each cash flow discounted at the relevant interest rate The effective interest rate is the annualised rate that takes account of compounding within one year
Valuation of Debt Securities Lecture Three - Short term debt instruments mature in less than a year and only pay the promised face value at maturity - Bonds are long term debt instruments issues by firms or government entities - The price of a security today equals the present value of all future expected cash flows discounted at the appropriate required rate of return (or discount rate) - A bond’s yield to maturity is the rate of return that an investor would earn if the bond was held until it matured o Where YTMcoupon rate, bonds will sell at a discount
Introduction to Business Finance and Financial Mathematics I Lecture One -
-
Managers should aim to maximise the value of their firm by taking on profitable investments. This results in maximum shareholder wealth Money has time value because of compounded interest In simple interest, the value of a cash flow is calculated without including any accrued interest to the principal In compounded interest, the value of a cash flow is calculated based on the principal and interest accrued The present and future values of a cash flow depend on the time period, the interest rate, and the method of computing interest Nominal interest rate: rate charged more frequently than quoted, e.g. 5% p.a. paid quarterly Effective interest rate: frequency of payment matches quoted rate, e.g. 5% p.a. paid annually Real interest rate: adjusted for inflation Nominal interest rate: unadjusted for inflation
Lecture Two -
Ordinary annuities are periodic, end of the period cash flows Deferred ordinary annuities are periodic, end of the period cash flows that start at a future date Annuities due are periodic, beginning of the month cash flows The future value of an annuity is the sum of the future values of each cash flow compounded at the relevant interest rate The present value of an annuity is the sum of the present values of each cash flow discounted at the relevant interest rate The effective interest rate is the annualised rate that takes account of compounding within one year
Valuation of Debt Securities Lecture Three - Short term debt instruments mature in less than a year and only pay the promised face value at maturity - Bonds are long term debt instruments issues by firms or government entities - The price of a security today equals the present value of all future expected cash flows discounted at the appropriate required rate of return (or discount rate) - A bond’s yield to maturity is the rate of return that an investor would earn if the bond was held until it matured o Where YTMcoupon rate, bonds will sell at a discount
