Key Foundations of Finance: An Overview

Now that you have some idea of what to expect, let’s take a closer look at where this book will take you. Consider this book a guided tour through finance.

We start your inroads into the finance world by learning to “speak finance.” And in finance, CASH IS KING. Therefore, you first learn to properly name cash-flows according to their patterns.

Next you learn the notion of equivalence of cash-flows and the mechanics of time value of money. As a finance professional you will need to be able to “transform” one set of cash-flows into another. For example, how to transform a client’s income earned today into retirement income forty years from now. These techniques are covered in the basic time value of money (TVM) operations.

At this point, you will have the TVM Toolkit you need to solve many personal and business fi- nance problems that occur in real life. In particular, you will know how to invest today to cover future liabilities.

The first “complexity” to your financial security is inflation. You will learn to modify your fi- nance TVM toolkit to adjust your planning for price changes.

Once you have your TVM toolkit in hand, you’re ready to start investing and the first asset you’ll consider is bonds. First, you’ll learn the language of bonds and how to determine how much bonds are worth and the types of risk you’ll experience from owning and selling bonds.

A key factor of bonds is the interest rate. You will learn what factors determine the interest rates and learn one way the market predicts interest rates.

Being familiar with bonds, the next asset you’ll consider is equities (stocks) where you learn how to find the price of stocks using a variety of methods.

After you’ve mastered the valuation of traded assets such as stocks and bonds, we’ll consider how firms choose projects to maximize the benefit to their owners. Prior to acquiring projects, you learn the techniques of capital budgeting, which will allow you to use a variety of tech- niques to evaluate which business projects will increase your wealth and which ones will not.

Once you understand various techniques for evaluating the benefits of a project for a firm, you will examine the cost associated with acquiring firm assets (projects). This cost is known as the firm’s cost of capital.

At this point in the book you will know that virtually every decision you’ll make in finance involves cash-flows. The last topic you will cover is how to estimate the cash-flows relevant to evaluating a project or firm.

Following you see the topics of the course in outline form. There are seven topics in the course, but as you can see, time value of money has the most content and is covered in the greatest de- tail. This is because time value of money (or TVM) is THE most important concept in modern finance.