Lecture 1 Flashcards
Real investments
Investment in real assets, that is assets that will produce real goods and services (land, building, equipment, knowledge)
Finance investments
Investment into financial assets. A financial asset is a contractual claim to a stream of cash flows.
Direct finance
Finance through financial markets
Indirect finance
Finance through financial intermediaries
Capital Allocation Function
Impossible to reallize an investment greater than today’s own savings.
Consumption shifting function
Need to store your savings ‘‘under your bed’’ if you can’t consume all of it today.
Risk Allocation Function
Difficult to spread the risk on your savings across many firms.
Information creation function
In the absence of securities’ prices, difficult to know whether financial contract is a
“fair” or “unfair” deal
liquidity provision function)
Difficult to get your cash back from the firm today if you suddenly need the money
Time Value of Money
The concept that a pound at one point in time is not worth the same as a pound at another point in time
Simple interest
interest earned only on the original principal amount invested
Compound interest
interest earned on both the initial principal and the interest
reinvested from prior periods
Present value
the current value of a future cash flow or a series of future cash flows
Discounting
translating a future cash flow into its value in a prior period, most often
(but not necessarily) the present period
