capital, interest, and profit Flashcards
what is capital
man made resources used in the production of goods and services
types of capital
- tangible capital
- intangible capital
types of financial assets
- paper based
- electronic records
what is paper based
monetary claims by one party against another
what is electronic record
accounts in banks and digital wallets
function of financial asset
bridge connecting savers and borrowers
explain bridge connecting savers and borrowers
savers often have savings in banks, commercial banks collect the savings and loan to those in need. this helps support business growth
what is interest rate
cost of borrowing money
factors that influence interest rate
- maturity(duration)
- level of risk
- liquidity of assets
how does maturity influence interest rate
if it’s short term it’s a lower interest rate
if it’s long term it’s a higher interest rate due to uncertainty
how does level of risk influence interest rate
if high risk higher interest rate to compensate lender for potential loss
if low risk low interest rate because borrower is more likely to pay
how does liquidity of assets influence interest rate
high liquid asset have lower interest rate
less liquid asset have higher interest rate
what is the concept of PV
helps determine how much future money is worth today
how to calculate PV
FV/(1+i) to the power of number of period. interest rate in decimal
how to calculate PV for uneven periods
P1/1+r + p2/(1+r) to the power of 2 and so on
