Time exerts the greatest influence on your investment portfolio than any other force. Through the power of compounding, a small amount of money over time can grow into a substantial sum. Compounding is an investor’s best friend. Investments can increase in value over time – and the longer the time frame, the greater the value. … Continue reading The Power of Compounding – Interest Examples

# Category: Investing and Financial Planning

### Perpetuities – Definition & Calculation

Perpetuity Definition: A perpetuity is an annuity that provides payments indefinitely. Since this type of annuity is unending, its sum or future value cannot be calculated. Examples of perpetuity: Local governments set aside monies so that funds will be available on a regular basis for cultural activities. A children’s charity club set up a fund … Continue reading Perpetuities – Definition & Calculation

### Standard Deviation — Definition & Calculation

Definition: Standard deviation is a measure of how far apart the data are from the average of the data. If all the observations are close to their average then the standard deviation will be small. How to calculate standard deviation:Suppose that an investor has $600 to invest and is considering investing all of it in … Continue reading Standard Deviation — Definition & Calculation

### Information Asymmetry

An economy is said to be characterized by information asymmetry when some parties to business transactions may have an information advantage over others. Types of information asymmetry The first is adverse selection. Adverse selection occurs because some persons, such as managers and other insiders know more about the current condition and future prospects of the … Continue reading Information Asymmetry

### Bond Valuation — Calculation

Bonds can be purchased at any time. To value the bond, the procedures differ depending on whether the bond is purchased on the date interest is regularly paid (interest date) or whether it is purchased “between interest dates”. How to calculate the Purchase Price of a Bond on an Interest Date Formula to be used: … Continue reading Bond Valuation — Calculation

### Capital Budgeting – Procedure & Decision Process

Capital budgeting is the process by which the financial manager decides whether to invest in specific capital projects or assets. In some situations, the process may entail in acquiring assets that are completely new to the firm. In other situations, it may mean replacing an existing obsolete asset to maintain efficiency. During the capital budgeting … Continue reading Capital Budgeting – Procedure & Decision Process

### Cost of Capital WACC — Formula & Calculation

The cost of capital is the expected return that is required on investments to compensate you for the required risk. It represents the discount rate that should be used for capital budgeting calculations. The cost of capital is generally calculated on a weighted average basis (WACC). It is alternatively referred to as the opportunity cost … Continue reading Cost of Capital WACC — Formula & Calculation

### CAPM – Capital Asset Pricing Model

In an efficient securities market, prices of securities, such as stocks, always fully reflect all publicly available information. This raises the question “What should the price be?” The well-known Sharpe-Lintner capital asset pricing model (CAPM) provides an answer. According to the model a share’s current market price will be such that: Expected return on the … Continue reading CAPM – Capital Asset Pricing Model

### Present Value – Formula & Calculation

Present value refers to today’s value of a future amount. Present Value Formula: S P = ———— (1+rt) Instead of beginning with the principal which is invested, you could start from what you want to accumulate in the future, and then work backward to see the amount that you must invest to reach the required … Continue reading Present Value – Formula & Calculation

### Efficient Markets Hypothesis – Theory & Definition

Definition An efficient securities market is one where the prices of securities traded on that market at all times “properly reflect” all information that is publicly known about those securities. Noteworthy Points of the Theory First, market prices are efficient with respect to publicly known information. The possibility, therefore, of inside information is not ruled … Continue reading Efficient Markets Hypothesis – Theory & Definition