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

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 1

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 2

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 3

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 4

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 5