2. •Summary
25’ What is finance?
Definition and concepts
5’ The value of time
Add a second line of text here
5’ Interest
Consumption vs Investment
10’ Building up a business
Financial accounting
15’ Risk and hedging
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3. •Catch 22
A win / win proposition
You will write
I will teach code to model
finance what you have
learned
I accept the agreement
4. •Finance defined
The flow of money in economic ecosystem
People
Companies
$€£¥ Income
Merchandise Manufacture
Services Financial
Government
5. Finance
Merriam-Webster definition
• The system that includes the circulation of money, the granting
of credit, the making of investments, and the provision of
banking facilities.
8. •Government
Only death and taxes are certain
• Need money to run daily activities
• Earn money from taxes
• Finance activities by loaning money-> bonds
• Government always pays up debt
• => risk free
• => benchmark
9. •Companies create value
The engine of growth
• Financing
• Sell shares (capital)
• Loan money (liabilities)
• Run operations => Sell products and services on the market
• Buy equipment
• Labor Inventory
• Supplies
• Working capital
• Revenue
• Pay dividends: utility companies
• Re-invest: technology companies -> GROWTH
10. •The value of time
Compound interest
FV1 = (PV + PVx r%) = PV(1+r%)
FV2 = FV1 + FV1 x r% = PV (1 + r%) + PV(1 + PV x r%) x r% =PV(1 + r%)(1+r%) = PV(1+r%)2
FVn = PV(1+r%)n or PV = FV / (1+r%)n
Present Value Interest Rate Future Value
11. •The theory of interest
• 1930 Irving Fisher -> time preference
• Do I want to consume now, or I want to wait for later.
• The eagerness to consume now regulates the interest rate!
• Interest rate = the cost of money
• Loan: contract lender and borrower (amount, rate, duration,
payments)
• http://www.econlib.org/library/YPDBooks/Fisher/fshToI.html
12. •It all boils down to a contract
Contract
Issuer Holder
Rights Obligations
Obligations Rigths
13. •Timelines
Give Receive Now Future
Now Spot Investment,
Deposit
Future Financing, Loan Derivatives
14. •Tom Philips – t-shirt business
Tom loved to play basketball. He wants to start his own business.
T-Shirts for casual players like himself, not for players on a
team
Poll: Friends would buy a t-shirt with
a “no-look” pass on it.
1. Buy simple t-shirts.
2. Print something nice on it (adding value).
3. Sell the personalized t-shirt.
15. •Building up a business
Balance sheet
Assets Liabilities Liabilities Capital Revenue Dividends Note
(cash) Payable Inventory stock expenses
$5.000 $5.000 Tom’s own money
(capital)
$500 $500 Loan from mom
(capital)
($400) $400 Purchase 100 T-Shirts
($4)
($50) ($50) Advertising
$900 ($360) $900 Sells 90 T-Shirts ($10)
($360)
($505) ($500) ($5) Repays loan and
interest
($100) ($100) Dividend
$5.345 $0 $40 $5.000 $485 (@100) Bottom line
16. •Financial statements
• Income statement – lists the revenues and expenses for the
period
• Balance sheet – a summary of assets and liabilities
• Statement of changes in shareholders equity
• Statement of cash flow – shows how changes in balance sheet
are reflected in cash
17. •Risk and hedging
• Government – risk free (always paid back on time)
• Companies – uncertainty that money are paid back
• Market risk -> cannot sell (price, competition, no need)
• Operational risk -> cannot deliver (lack of resources)
• Strategy risk -> cannot sustain (keep up with competition)
• Market risk – volatility (fluctuation in value)
• Interest rates (inflation)
• Foreign currency
• Price volatility
18. •Risk hedging
Hedging = risk mitigation in finance
• Diversification, diversification, diversification
• – 30 stocks is the magic number
• Insurance: derivatives
• Interest rate swap
• Options
19. •Don’t forget your homework
• Pick any subject presented
• Write code
• Create a model (UML, DB, GUI)
• Write user stories
• Write test cases
• Want to learn more:
• https://class.coursera.org/introfinance-2012-001/class/index
• Financial Accounting, Pennsylvania State University Edition
