Overview

Finance is the study of fund management and asset allocation over time. Funds consist of money and other assets. There are many different types of finance, but all are fundamentally concerned with studying how best to allocate assets in different conditions over time.

Importance of Time

The underlying driver behind all of finance is time. There are two reasons why time is so important to finance:

Time value of money: For a number of reasons, money today is worth more than the same amount of money in the future. For example, you would rather have $100 today than $100 in 10 years – the money is worth more to you now than it would be in the distant future. We will explore this concept in greater depth later on.
Risk: Making an investment does not guarantee a return. When a bank makes a loan, they’re not sure the debtor will pay it back. There is a risk that the person will just take the money and run, the debtor will file for bankruptcy, or, for dozens of other reasons, the bank will not get the money they lent back.
The field of finance, however, embraces time. Finance says, “Since I know assets change value over time, how do I use that to cause my assets to change value in the direction I want? How do I manage assets so that they’re worth more in the future than they are today? ”

Challenges in Finance

Figuring out what to do with assets is sometimes easy: all of the variables are known, and there is clearly an option that is better than all the others. However, most of the time, this is not the case. Finance generally operates with a lot of uncertainty. As a result, companies hire entire departments of people to help them figure out which option is best.

Why Study Money, Banking and Financial Markets?Financial markets are markets in which funds are transferred from people and firms who have an excess of available funds to people and firms who have a need of funds Bond Market and Interest Rates A security is a claim on the issuer’s future income or assets A bond is a debt security that promises to make payments periodically for a specified period of time – principal returned to a lender at maturity An interest rate is the cost of borrowing