Time value of money

The value of money that figures given amount of interest earned over given amount of time is known as time value of money. It evaluates the stream of income in future. Some standard calculations based on time value of money are:
• Present value is current worth of future sum of money given at specified rate of return.
• Present value of an annuity series of equal payments that occurs in evenly spaced intervals. E.g. leases and rental payments.
• Present value of a perpetuity constant and infinite stream of even cash flow.
• Future value is the value specified at future that is equivalent to a value specified sum today.

Speculations

Speculation is an action of finance that does not promise safety of initial investment and return on principal sum. It has low margin of safety or risk of loss of principal investment. Tobin tax is a tax intended to reduce short term currency speculation, to stabilize foreign exchange. Long-term investors can be classified a speculators. Short selling, trading in oil and gold are all speculative. Speculation is different from investment. In many common stock situation there is possibility of profit and loss, so speculation is unavoidable. Speculation has economic benefits by reducing prices and surplus that encourages consumption and export and it is done by speculators.

Right-financing

Right-financing was coined to adopt appropriate policy, financial and institutional support mechanisms to maximize sustainable returns on public and private investments over time. Its application as a conceptual framework results in governance, private and public investment finance principles to work for optimal financing framework for a given investment. Right-financing adopts public finance management. It’s about determining an acceptable supply of financing for government and private sector entities because these entities deliver higher-quality and more equitable services over time. Early phase of investment requires establishment of right policy, debt, loan, monetary, fiscal and security decisions is essential for establishing effective economic growth and risk management frame work.

Microcredit

Microcredit’s are small loans credited for entrepreneurs in poverty. These individuals can’t even meet minimal qualifications to gain access to traditional credits. This is a wider range of financial service for the poor and it is part of microfinance. This follows separate set of principles distinguished from general financing. It plays a role in socio-economic development, employment generation and trust building. This facility originated in Bangladesh at a bank named Grameen bank. It helped in building wealth and explicating poverty. Because of the success many traditional banking industries started this scheme. The united nation declared 2005 as the International year of microcredit.

Gearing or leverage

Leverage refers to use of debt to supplement investment. Companies use this maximize gains and to increase returns to stock. Types of leverages are:
• Financial leverage – is form of loan and is invested to earn greater rate of return than cost of interest.
• Operating leverage- associates with fixed costs and the extent to which fixed assets are utilized in business.
• Combined stand-alone leverage-is operation two leverage types in combo.
• Correlation leverage- is the degree of variability in firm’s value which is correlated with variability of universe of all risky assets.
• Derivatives-allows leverages without borrowing explicitly

Financial modeling

Financial modeling is a task of building a model of financial decision making situations. It is a mathematical model designed by computer stimulations. It is designed in such a way to represent performance of a project, business, portfolio or any other forms of financial investment. It is model designed to control the risks in financial investment. Some of the financial models are listed below:
• Mean-variance portfolio and estimation
• Bond portfolio management
• Risk measurement
• Capital budgeting
• Exotic option valuation
Various fields where financial modeling is applied are project finance, business valuation, portfolio problems, financial statement analysis et

Arbitrage

Arbitrage is a practice followed by finance by taking advantage of price differential between 2 or more markets. It strikes a combination of matching deals that capitalize upon imbalance and profit will be the difference in market price. Arbitrage is also known as risk-free profit with positive flow. Statistically it is concerned with expected profit so this may have losses. A condition of arbitrage when any one of 3 obeys it is possible:
• 2 assets with same cash flow don’t trade with identical costs.
• By law of one price, same asset doesn’t trade at same rate at all markets.
• No trading with future price at risk-free interest rate.