Business and Economics1 course

Finance

Interest, time value of money, loans and investment returns.

About Finance

Finance is about the time value of money: a dollar today is worth more than a dollar next year because it can earn interest. The fundamentals course covers simple and compound interest, present and future value, annuities, loans and mortgages, and the basic trade-off between risk and return.

A few formulas cover most problems. Compound growth is $A = P(1 + r/n)^{nt}$ , present value discounts a future amount by $(1 + r)^t$ , and a loan payment comes from the annuity formula. Understanding these explains why paying a credit card balance early saves so much and why starting to save early matters.

These ideas apply to student loans, car loans, mortgages, retirement savings and comparing investment options. Businesses use the same present-value reasoning to decide whether a project is worth funding, so the topic is useful whether or not you plan a finance career.

Finance Fundamentals

Interest, annuities and loan payments. (College)

Simple and Compound Interest

Interest is the price of borrowing money, or the reward for lending it. Simple interest is paid only on the original principal: $I = Prt$ . Compound interest is paid on the principal plus interest already earned, so the balance grows faster and faster: $A = P\left(1 + \frac{r}{n}\right)^{nt}$ for $n$ compounding periods per year.

Time Value of Money

A dollar today is worth more than a dollar next year, because today's dollar can be invested to earn interest. The time value of money makes this precise. Future value grows a present amount forward: $FV = PV(1 + r)^n$ . Present value discounts a future amount back: $PV = \frac{FV}{(1 + r)^n}$ .

Loans and Amortization

Most car loans and mortgages are amortising loans: you pay the same amount every month, and each payment covers that month's interest first, with the rest reducing the principal. Early payments are mostly interest; later payments are mostly principal, because the balance the interest is charged on keeps falling.

Full Finance Fundamentals course outline

How to study Finance

Draw a timeline with each cash flow and the date it happens.
Match the rate to the period: use a monthly rate with monthly payments.
Estimate first with the rule of 72: money doubles in about $72 / r$ years at $r$ percent.
Check answers with a calculator and explain in one sentence what the number means.

Before you start: Algebra, percentages and exponents.
Where it leads: Corporate finance, investments or accounting. The same tools are used in personal budgeting and in comparing real loan or savings offers, where small rate differences add up over many years.

Key terms in Finance

Time value of money: A dollar today is worth more than a dollar later because it can earn a return; discounting puts future amounts in today's terms.
Compound interest: Interest earned on earlier interest; a balance grows as $A = P(1 + r/n)^{nt}$ .
Present value: Today's worth of a future payment, $PV = FV/(1 + r)^t$ , used to compare cash flows that arrive at different times.
Annuity: A series of equal payments at regular intervals, such as loan repayments or a monthly savings plan.
Net present value: The sum of discounted cash flows minus the upfront cost; a positive NPV means the project beats the chosen rate.
Diversification: Spreading money across investments that do not move together, which lowers risk without necessarily lowering expected return.