Most used finance Terms

      here are the most commonly used finance terms used in the business program:

1.       Time value of money  

A dollar today is worth more than a dollar tomorrow. This may sound ambiguous at first, but it has truth to it. The reason for this is that money could always be invested today and, in the future, earn return on it . Let’s suppose we have $1000 and interest rate is 10%, then we will earn $100 after a year if we invest today. Because of interest earned, the value of $1000 today is equal to $1100 after a year or you could say that worth of $1000 today is more than $1000 after a year.

    2.  Present and future value

Because of time value of money we get the terms present and future value. future value is the value for which it is equal to the present/current value after some time "n". considering the previous  example of investing $1000 today and earning $1100 after a year because of interest, the $1000 today is the present value and the $1100 earned is the future value after one year has passed.

    3.  payback period(PBP)

  Payback period tells us the number of years required to gain back what we have invested based on the   expected cash flows. It is a concept in the capital budgeting technique to estimate feasibility of any   investment/project. lets say I have invested $100000 and I am expecting to recover this amount in five   years, then the payback period is 5 years. The project with lower payback is usually preferred if we   exclude the time value of expected cash inflows.

 4. Net Present Value(NPV)

  

It is also one of the capital budgeting technique. it is the sum of all the present value of expected cash inflow and is subtracted from the initial cash outflow. The project would be considered worthy of investment if  the NPV is equal to 0 or more. in case of mutually exclusive projects, the one with the more positive NPV would selected.

 5. Simple and compound interest

simple interest is the interest earned only on the original amount lent where else compound interest is the amount earned on any previous interest earned and also on the original amount lent. the interest earned with compounding will always be more compared to simple because of its " interest-on-interest"

 6.  Bond

A bond is a long term debt instrument which usually has a maturity of 10 or more years. A bond has the following basic features/characteristics:

• Maturity: it is the time when the company is obligated to pay the bondholder the par value along with the interest incurred.

• value: is the value that is needed to pay to the bond holder at the time of maturity. par value is usually $1000

•  coupon rate: the rate of interest on the bond is called called coupon rate

   7. Common stock

The common stockholders are the owners of the company and also bear the risk associated with ownership. common stock shareholders however have liability limited to the amount invested by them.in case of liquidation, the common stock shareholders have the right on the remaining value assets of the company after the claims by preferred stocks and creditors have been fulfilled.