Finance, Loans and Fin Maths Risk and return: Types of profits - - PDF document

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THOUGHT FOR THE SESSION

Generosity is not a once-off act, but a life-style of caring

Finance, Loans and Fin Maths

Introduction - Financing for:

– Individuals (Debt) – Corporates (Equity, debt, hybrids) – Government (Taxation, duties, debt)

Different forms of finance

Finance, Loans and Fin Maths

Risk and return: Types of profits (returns) on

investments (Cost in financing):

– Interest or discount – Dividends – Rental income – Capital value growth

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Finance, Loans and fin Maths

Risk vs. Interest paid:

– Level of risk

Exercise 1

– Rights to borrower – Taxation

Different types of rates

Finance, Loans and fin Maths

Calculations and concepts - General

principles:

– Include first day, exclude last day – Calculation vs. compounding – Repayment components – Interest quotation (NA??)

Finance, Loans and fin Maths

Calculation:

– ROI & AROI

Example 2

– Simple vs. compounded interest (NACM, NACQ, NACSA, NACA) – Annualised Nominal vs. effective interest

Convert the following to effective rates:

– 10,7%NACM; – 9,7% NACQ

Which investment will you invest in: 9.18%

NACQ, or 9.28% NACSA

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Finance, Loans and fin Maths

Calculation:

– Present & future values

Exercise 3 & 4 Other examples

– Ordinary fixed loans

Example 5

– Floating rate loan

Example 6

Finance, Loans and fin Maths

You borrow R 350 000 for 5 years at

9.5% NACM from the bank on 1 Jan 2012

On 1 March 2012 the interest rate

changes to 10%, what is your new monthly re-payment?

Finance, Loans and fin Maths

Products:

– Overdrafts – Home loans – Vehicle finance: Statements

Loans with residuals and deposits:

Example 7

– Consolidated loans

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Finance, Loans and fin Maths

Yield curve:

– What is the yield curve? – Why a yield curve? – Construction of the yield curve.

Example 10 a) – e)

– Interest rate risk and hedging

Finance, Loans and fin Maths

Hedging interest rate risk

– FRA’s

What it is How is it constructed? Calculation of the rate

– Example 10 f)

Finance, Loans and fin Maths

Money markets: Discount, interest rate

and yields

– Discount vs. yield vs. AER

Exercise 11, 12, 13

– Yield curve using Risk Free instruments

Exercise 10

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Finance, Loans and fin Maths

– Statistical methods:

Simple vs. weighted averages Example: In Company is 1 Director

earning R 50 000, 2 Managers earning R30 000 and 4 Clerks earning R 10 000

Un-weighted average = R 30 000 Weighted = R150 000 / 7 = R 21 429 Exercise 14

Finance, Loans and fin Maths

– Statistical methods:

Standard deviation = volatility, measurement of

risk.

CV combines performance and risk, thus:

CV = Standard deviation / Performance x 100 = x% Assumption with Technical analyses and statistics: Past trends will repeat in the future – Example 15

Finance, Loans and fin Maths

– Statistical methods:

Interpolation: Your son saved some money, the

amount is unknown. You decide to pay him an amount for feeding the dogs

• everyday. With his savings and your

payment, he has R 20 on day 5 (after your daily payment) and R 26.75 on day

• 10. How much did he have on day 8?

Assignment