Principles of Finance Study Notes

Overview of Principles of Finance

• Focus on how individuals, businesses, and institutions manage financial resources.

Structure of the Course

1. Overview of the subject.
2. Finance disciplines, markets, and firm types.
3. Four fundamental concepts in finance.
4. Interest types and rates (simple vs. compound).
5. Future and present values of cash flows.

Key Instructors

• Sean Pinder: Acting Assistant Dean, PhD in Finance.
• Zhuo Zhong: Associate Professor, PhD in Economics.

Assessment Overview

• Assessment 1: 15% (peer review tasks).
• Assessment 2: 25% (60-minute in-class test).
• Assessment 3: 60% (2-hour closed-book exam).

Key Concepts in Finance

1. Cash Flow Focus: Importance of cash flows over accounting profit.
2. Time Value of Money: Future cash flows are worth more than present cash flows.
3. Risk and Return: Risk is tied to variability; investors prefer lower risk for the same return.
4. Firm Objective: Maximize firm value; equity and debt as sources of funds.

Financial Mathematics Core

• Simple Interest: Calculation based on principal only.
• Compound Interest: Calculation includes accumulated interest.
• Future Value (FV) and Present Value (PV) calculations fundamental to financial decisions.

Key Formulas

• Simple Interest:
  $FV = PV_0(1 + r imes n)$
• Compound Interest:
  $FV = PV_0(1 + r)^n$
• Present Value (PV):
  $PV_0 = \frac{FV}{(1+r)^n}$
• Effective Rate Conversion:
  $r_e = \left(1 + \frac{r}{m}\right)^m - 1$

Summary

1. Cash is king; focus on cash flows for decision making.
2. Time value of money affects asset valuation.
3. Investors assess risk versus return.
4. Firms should maximize overall value.