Introduction to Finance

W H E R E W E A R E G O I N G . . .
Chapter 10 focuses on the characteristics and valuations of bonds and stocks. You will learn 
about the long-term external fi nancing sources available to and used by businesses. You will 
then explore the characteristics and features of both debt and equity capital. Next, the general 
principles of valuation, which build on the time value of money (covered in this chapter), and 

---

9.1 Basic Time Value Concepts
219
how bonds and stocks are valued will be covered. Calculating rates of return is the last topic 
in Chapter 10. In Chapter 11, you will focus on the characteristics and operation of primary 
and secondary securities markets. Chapter 12, the last chapter in Part 2, will focus on fi nancial 
return and risk concepts. 
H O W T H I S C H A P T E R A P P L I E S TO M E . . .
You probably have experienced the need to save money to buy an automobile or to pay for 
your tuition. Your savings grow more rapidly when you can earn interest on previously 
earned interest in addition to interest on the starting amount of your savings. This is known 
as compounding and means that the longer you save the faster your savings will grow and the 
larger will be your down payment on your automobile purchase or the more money you will 
have for your tuition. An understanding of compounding also will be useful to you when 
investing in stocks and bonds and planning for eventual retirement.
Most of us would agree that if other things are equal,
More money is better than less money.
Most of us also would agree,
Money today is worth more than the same amount of money received in the future.
Of course, the value of an additional dollar is not necessarily the same for all individuals. For 
example, a person subsisting at the poverty level would likely fi nd an added dollar to be worth 
more in “economic terms” than would an extra dollar to a millionaire or billionaire. It is probably 
safe to say that having an added dollar today has more “economic worth” to you or us than it 
would to Bill Gates, the founder and CEO of Microsoft Corporation. At the same time, Bill Gates’ 
personal desire or drive for accumulating more dollars is likely to be greater than your desire. 
This chapter makes no attempt to consider the economic or psychological value of having 
more money to a specifi c individual. Rather, it concentrates on the principle of fi nance, initially 
presented in Chapter 1, stating that “money has a time value.” The focus here is on how money 
can grow or increase over time, as well as how money has a lower worth today if one has to wait 
to receive the money sometime in the future. This occurs because one loses the opportunity of 
earning interest on the money by not being able to save or invest the money today. 
Financial calculators or spreadsheet software programs will perform the calculations and 
procedures discussed in this chapter. However, the calculation procedures are fi rst described 
in detail to enhance your understanding of the logic involved in the concepts of the time value 
of money. By learning to work the problems the “long way” using step-by-step calculations 
and following the steps given for fi nancial calculators, spreadsheet programs, and tables-based 
calculations should make more sense. Students are encouraged to explore using multiple 
problem-solving methods.