Docsity
Log inSign up
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search Store documents

The best documents sold by students who completed their studies

Search through all study resources
Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

University Rankings

Discover the best universities in your country according to Docsity users

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

From our blog

Exams and Study
Go to the blog

Quantitative Skills for Business: Lecture 4 - Basis Financial Analysis, Lecture notes of Business Finance

University of DerbyBusiness Finance

This lecture note provides a comprehensive overview of fundamental financial analysis concepts, including interest rates, types of interest, future value, present value, and the rule of 72. It delves into the calculation of simple and compound interest, future value and present value with simple interest, and the general future value formula. The document also explores the rule of 72 for estimating investment doubling time and the general present value formula. Additionally, it covers the net present value (npv) method and internal rate of return (irr) for evaluating investments.

Typology: Lecture notes

2023/2024

Available from 12/19/2024

amnah-asghar
amnah-asghar 🇬🇧

5 documents

1 / 7

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
14/10/2024
QUANTITATIVE SIILLS FOR BUSINESS: Lecture 4: BASIS FINANCIAL ANALYSIS
1. Interest Rate
• Definition: The interest rate is the percentage charged on the total amount of
money borrowed or earned on an investment.
• Importance: It plays a crucial role in financial decisions, affecting loans,
investments, and economic policy.
• Formula for Interest Rate:
• Example:
• A loan of £1,000 at a 5% interest rate for one year will incur £50 in interest:
2. Types of Interest
a) Simple Interest
• Definition: Interest is calculated only on the initial principal or investment.
• Formula:
•
• Where:
•
II
= Interest
• P = Principal (Initial amount)
•
r
= Interest rate (as a decimal)
•
t
= Time (in years)
pf3
pf4
pf5

Partial preview of the text

Download Quantitative Skills for Business: Lecture 4 - Basis Financial Analysis and more Lecture notes Business Finance in PDF only on Docsity!

QUANTITATIVE SIILLS FOR BUSINESS: Lecture 4: BASIS FINANCIAL ANALYSIS

1. Interest Rate

  • Definition : The interest rate is the percentage charged on the total amount of money borrowed or earned on an investment.
  • Importance : It plays a crucial role in financial decisions, affecting loans, investments, and economic policy.
  • Formula for Interest Rate :

• Example:

  • A loan of £1,000 at a 5% interest rate for one year will incur £50 in interest:

2. Types of Interest

a) Simple Interest

  • Definition : Interest is calculated only on the initial principal or investment.
  • Formula :
  • Where:
  • II= Interest
  • P = Principal (Initial amount)
  • r = Interest rate (as a decimal)
  • t = Time (in years)
  • Example:
  • If you invest £1,000 at a 6% annual interest rate for 3 years: I=1,000×0.06×3=£

b) Compound Interest

  • Definition : Interest is calculated on the initial principal and also on the accumulated interest from previous periods.
  • Formula : Where:
  • A = Amount after interest
  • P = Principal
  • r = Annual interest rate (decimal)
  • n = Number of times interest is compounded per year
  • t = Time (in years)

Example:

  • £1,000 compounded at a 6% interest rate, compounded annually for 3 years

• Example:

  • If you want £1,200 in 4 years at 5% interest:

4. General Future Value Formula

  • Definition : Calculates the value of an investment or loan in the future.
  • Formula :
  • Where:
  • FV = Future Value
  • PV = Present Value (initial investment or loan amount)
  • r = Interest rate per period
  • t = Number of periods

• Example:

5. Rule of 72

  • Definition : A simple rule used to estimate the number of years it takes for an investment to double in value, given a fixed annual interest rate.
  • Formula :

Where:

  • r = Interest rate (as a percentage)

• Example:

  • At a 6% interest rate

6. General Present Value Formula

  • Definition : Present value (PV) is the current worth of a future sum of money, given a specified rate of return.
  • Formula :

Where:

  • FV = Future Value
  • r = Discount rate or interest rate per period
  • t = Time period

Example:

  • Want £1,000 in 5 years at a 7% interest rate

  • Rt = Cash flow at time ttt

  • IRR = Internal rate of return

Example:

  • If an initial investment of £1,000 generates returns of £400 for 3 years, the IRR is the rate that makes the NPV zero. Solving this typically requires trial and error or a financial calculator.