In that sense, finance can be related to these 3 actors: Corporations/companies (through corporate
finance), Individuals (through personal finance),Government (through public finance).
Value: The importance, worth, or usefulness of something.
Time value of money is a concept that describes how the money available to you today is worth
more than the same amount of money at a future date.
Money is subject to inflation, eating away at the spending power of the currency over time, making it
worth less in the future.
There is always the risk of not actually receiving the dollar in the future.
A dollar can earn interest over time, giving it potential earning power.
Why is 100 dollar worth more today than 100 dollar tomorrow?
Because of interest, they say (reason for time value of money).
Why is there interest?
Because there is time value of money (result of time value of money).
Simple interest It is interest that is paid (earned) on only the original amount/principal borrowed
(lent).
Compound interest It is interest paid (earned) on any previous interest earned, as well as on the
principal borrowed (lent).
An annuity is an asset that pays a fixed sum each period for a specified number of years.
AMORTIZING A LOAN
The formula and table for present value of annuities can be used for a specific case called
installment-type loan.
It is a loan repaid in equal periodic payments that include both interest and principal.
These payments can be made monthly, quarterly, semiannually, or annually.
Installment payments are prevalent in mortgage loans, auto loans, consumer loans, and certain
business loans.
Security (or financial security) is a term commonly refers to any form of financial instrument.
We will especially be concerned with firms long-term securities that are;
bonds,
preferred stock,
common stock.
Because, in financial theory, there are two basic ways of financing or a firm:
Equity (stock),debt (bond).
Bond is a security that pays a stated amount of interest to the investor, period after period, until it is
finally retired by the issuing company.
Companies are not the only bond issuers.
Municipalities also raise money by selling bonds.
A bond has a face value. Face value is the stated value of an asset.
It has a maturity that is the time when the company is obligated to pay the bondholder the face
value of the instrument.
It has a coupon rate. It is the nominal annual rate of interest that is stated on the bond’s face
Coupon bond (which pays coupon/interest payments periodically),
Zero coupon bond (which does not pay any coupon but pays interest at the and of the payment).
required rate of return It is the minimum acceptable return on investment sought by individuals or
companies considering an investment opportunity.
A stock is a type of security that signifies ownership in a corporation and represents a claim on part
of the corporation’s assets and earnings.
There are two types of stocks:
Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends.
Preferred stock generally does not have voting rights, but has a higher claim on assets and
earnings than the common shares.
Most preferred stocks pay a fixed dividend at regular intervals.
Preferred stock has no stated maturity date.
Unfortunately, there is no consensus about the valuation of common stock.
Dividend discount models are designed to compute the value of a share of common stock under
specific assumptions as to the expected growth pattern of future dividends and the appropriate
discount rate to employ.
Constant Growth: If dividends are expected to grow at a constant rate
No Growth: Here the assumption is that dividends will be maintained at their current level foreve
Growth Phases: This calculation is used when there are different growth rates for different periods.
Only when V= P0 , investor’s required rate of return=market required rate of return
For example; the value of perpetual bonds is calculated as follows:
Here, V is equal to P0, if Kd (required rate of return for the investor) is equal to yield (market required
return).
If P0 > V, it means that yield<kd
If P0 < V, it means that yield>kd
Yield to maturity is the expected rate of return on a bond if bought at its current market
price and held to maturity; it is also known as the bond’s internal rate of return (IRR).
Vadeye kadar elde edilen verim, mevcut piyasa fiyatından alınmış ve vadeye kadar
tutulmuşsa, bono üzerinde beklenen getiri oranıdır; aynı zamanda tahvilin iç getiri
oranı (IRR) olarak da bilinir.
There are some properties regarding kd (market required return/yield) ere:
When yield>coupon rate, the price of the bond will be less than its face value. Such a bond
is said to be selling at a discount from face value.
When yield<coupon rate, the price of the bond will be more than its face value. Such a bond
is said to be selling at a premium over face value.
When yield=coupon rate, the price of the bond will equal its face value. Such a bond is said
to be selling at par.
Verim> kupon oranı, tahvilin fiyatı değerinden düşük olacaktır. Bu tür bir tahvilin
piyasa değeri üzerinden indirimle satıldığı söylenir.
Verim <kupon oranı, tahvilin fiyatı değerinden yüksek olacaktır. Böyle bir bağın,
piyasa değeri üzerinden satış fiyatı olduğu söylenir.
Verim = kupon oranı, tahvilin fiyatı değerine eşit olacaktır. Bu tür bir tahvilin par.
If interest rates rise so that yield increases, the bond’s price will fall. That creates
something which is called interest rate risk.
Return on investment (ROI).It is a measure that investigates the amount of
additional profits produced due to a certain investment.
Belirli bir yatırım nedeniyle üretilen ek kar miktarını araştıran bir ölçüdür.
In finance, it is accepted that the only risk-free securities are treasury and
government securities.
Finansta, risksiz menkul kıymetlerin hazine ve devlet menkul kıymetleri
olduğu kabul edilir.
Standard deviation is actually the measure of dispersion.
Standart sapma aslında dağılımın ölçüsüdür.
Since we explained risk as the probability that an actual return on an investment
will be lower than the expected return, we would basically use probability
distribution in calculating risk.
Riski, bir yatırımın gerçekte gerçekleşen bir getirisinin beklenen getiriden
düşük olabileceği olasılığı olarak açıkladığımızdan, temel olarak riski
hesaplamak için olasılık dağılımını kullanırız.
In order to understand the attitudes of people towards risk, Certainty equivalent
(CE) is used.
İnsanların riske karşı tutumlarını anlamak için Kesin eşdeğeri (CE) kullanılır.