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Finance Concepts for Students

This document contains 5 questions and answers related to finance topics. The first question discusses why an annuity due has a greater value than an ordinary annuity due to interest being added for an extra period of time. The second question notes that the effective interest rate can differ from the nominal rate due to more frequent compounding in addition to annual compounding. The third question outlines that a financial manager's goal is to create an efficient portfolio with maximum return for minimal risk, which can be achieved through diversification. The fourth question briefly explains that debt includes scheduled repayments of borrowing while equity consists of funds from owners that are repaid based on company performance. The fifth question indicates that companies use the weighted average cost of capital (W

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Fahmida Faiza
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121 views19 pages

Finance Concepts for Students

This document contains 5 questions and answers related to finance topics. The first question discusses why an annuity due has a greater value than an ordinary annuity due to interest being added for an extra period of time. The second question notes that the effective interest rate can differ from the nominal rate due to more frequent compounding in addition to annual compounding. The third question outlines that a financial manager's goal is to create an efficient portfolio with maximum return for minimal risk, which can be achieved through diversification. The fourth question briefly explains that debt includes scheduled repayments of borrowing while equity consists of funds from owners that are repaid based on company performance. The fifth question indicates that companies use the weighted average cost of capital (W

Uploaded by

Fahmida Faiza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Part 2

1. State the reason(s) why value of an annuity due is always greater than an otherwise
identical ordinary annuity.

Answer: An annuity due is an annuity where cash flow occurs at the beginning of the
period and an ordinary annuity is an annuity where the cash flow occurs at the end of the
period. The value of an annuity due is always greater than an otherwise identical ordinary
annuity is because interest is added for an extra amount of time. As annuity due is
collected sooner it will always have a greater value due to the time value of money

2. What makes the effective rate of interest differ from the nominal rate of interest except
annual compounding?

Effective Rate of interest is the annual rate of interest that is actually paid or earned.
On the other hand, the nominal rate of interest is the annual rate of interest charged by a
lender or promised by a borrower, it is contractual. A deal is made between two parties.
Apart from the annual compounding another difference between effective and nominal
interest rate is that the effective annual rate increases with increasing compounding
frequency. Sometimes effective rate is significantly higher than the nominal rate.

3. What is the goal of a financial manager while creating a portfolio? How an investor can
theoretically form a successful portfolio?

The main goal of a financial manager while creating a portfolio is to create an efficient
portfolio, an efficient portfolio is a portfolio that will provide the maximum return for a
given amount of risk. An investor can theoretically form a successful portfolio by
attempting to reduce overall risk. This can be done through diversifying portfolios by
adding and combining assets that have the lowest correlation. Combining negatively
correlated assets can reduce the risk of portfolio without reducing the average return.

4. Briefly explain the distinguishing features of debt and equity.


Debt includes all borrowing, including bonds, incurred by a company and is repaid
according to a fixed payment schedule. It is obtained from creditors.
Equity consists of funds provided by the owners (investors or shareholders) of the
company that is repaid subject to the performance of the company. It is obtained from
investors who then become part owners of the firm.
Other major differences between debt and equity are. In equity the maturity is not stated
however in debt it is clearly stated. There is no interest deduction in equity but there is
interest deduction in debt.

5. Which discount rate firm uses for capital budgeting decision?


The weighted average cost of capital (WACC) is the discount rate firm uses for capital
budgeting decision. It is also called a firm’s cost of capital and it calculates the net
present value of a business. It is also used to assess investment opportunities, since it is
considered to represent the opportunity cost of the firm
By signing below, I Fahmida Faiza , holding NSU ID# 1811911030 hereby
acknowledge that I have completely read and fully understand the instructions of FIN254 Final
Assignment. I also affirm the truth of the following statements:

A. The work submitted is produced by me.


B. To my knowledge, no part of the submitted task is copied from anyone else
C. I acknowledge that I have an affirmative responsibility to submit authentic work that is done by me,
without any help taken from classmate/friend/seniors.
D. I also acknowledge that if I’m found guilty of cheating, submitting work of others, proven guilty of
sharing my work with others, I’ll be penalized and will face disciplinary action stated in NSU Code of
Conduct for students.

Signature Fahmida Faiza Date 28-05-20

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