Finance 101: Financial Skills for the Real World

Explore the time value of money by learning how money today is more valuable than tomorrow, calculating present and future values, compound interest, and using a timeline to compare investments.

Learn how to use a timeline to visualize cash flows, distinguish signs for investments and returns, and apply discounting to find present value or use compounding for future value.

interpret interest rates by linking the time value of money to present value through discount rates, and explain them as required rates of return and opportunity costs.

Explore how interest rates decompose into five components: real risk-free rate, inflation premium, default risk premium, liquidity premium, and maturity premium—and learn how these drive negotiation and investment decisions.

Explore compound interest and how the effective annual rate, calculated from the stated annual rate and compounding periods, differs due to compounding, with semiannual and monthly examples.

Explain the relationship between present value and future value under compounding, and derive the FV formula FV = PV(1+i)^n with periodic rate i and periods n.

Apply time value of money concepts to solve future value problems with quarterly and monthly compounding, compute periodic interest, and verify results with present value calculations.

Explore how compounding frequency affects the future value of investments, comparing quarterly, daily, and continuous compounding, and learn the continuous compounding formula using E and ln.

Explore ordinary annuities, where equal payments occur at the end of each period, and learn to calculate their future value and present value using annuity factors.

Annuity due shifts payments to the beginning of each period, increasing future and present values relative to an ordinary annuity; adjust by multiplying by 1 plus the rate.

Discover perpetuities, a form of annuity with endless cash flow, valued by the present value formula PV = PMT / r, with examples from console bonds and real estate rent.

Compute the future value and present value of unequal cash flows by discounting or compounding each payment, using a one percent rate, timelines, and Jessica's savings plan.

Learn to determine fixed payments for a mortgage or loan using the ordinary annuity formula, given future value, present value, time horizon, and an interest rate.

Calculate the years to reach a financial goal using time value of money concepts and the future value formula, solving for n with natural logarithms at eight percent per year.

Learn to compute the rate of return using time value of money concepts, from a single cash flow to an ordinary annuity, using present and future values.

Explore the cash flow adaptivity principle to time value of money by aggregating cash flows at the same time, then discounting to present value for parallel project analysis.

Calculate the net present value by discounting future cash inflows and outflows at the discount rate, reflecting the time value of money. Invest if NPV is positive, otherwise reject.

Compute net present value by discounting cash flows, including the initial cost, at the 10 percent cost of capital, and select the highest NPV among independent or mutually exclusive projects.

Calculate the internal rate of return from project cash flows and compare it to the discount rate and to NPV when deciding on investments.

Compare the net present value and internal rate of return rules for mutually exclusive projects, showing why npv better reflects project size, timing, and wealth creation over irr.

Calculate holding period return as (ending minus beginning value) over beginning value, adjusting for cash flows to capture total return; illustrated with a four-month t-bill and a stock dividend.

Explore the money weighted rate of return, also known as IRR, which accounts for timing and amount of all cash flows to measure portfolio performance.

Break the investment horizon into sub-periods, calculate each holding period return, and link them by compounding to derive the time-weighted rate of return, contrasting with money-weighted IRR.

Explore how to evaluate the performance of money market instruments by examining short-term debt securities, pure discount instruments like T bills, and the bank discount yield, including its drawbacks.

Explains three alternatives to the bank discount yield, including holding period yield, accrued interest in interest-bearing instruments, and money market yield, with practical T-bill calculations.

Learn to convert among money market yield, holding period yield, and effective annual yield, and understand bond equivalent yield with practical examples and compounding considerations.