Learnings In Finance

Probability is one the mathematical theories which finds enormous usage in normal world. When you meet your colleague in a mall on a holiday by chance, it could be a rare event of low probability. When we go for a planned medical procedure, we ask the doctor how much risk is involved in it. Depending on the answer, we go for it immediately or postpone a bit . We inherit many traits from our parents. Every human being has 23 pairs(46) of chromosomes. Out of 23 pair of chromosomes of mother, we get 23 (one from every pair);Out of 23 pair of our father we inherit 23.Which one we get from the pair ? Two of them are having equal probability to be inherited.So probability comes into picture when we talk about genetic aspects like your ear appearance  ( genetics ) or hereditary diseases. Quantum mechanics,following uncertainty principle, describes particles position and speed based on probabilistic wave function.This theory, got rejected wrongly by Einstein as he said 'God doesn...

Let see compounding interest formulas.  If P is principal r is interest rate per annum (for 10% interest, r = 0.1)   interest for one year = principal *interest rate = P*r . Total amount after one year =Principal + interest =P+Pr. In annually compound interest rate regime P+Pr = P(1+r) become principal at the end of first year.  Then the next year interest would be calculated on this principal P(1+r) r would be interest for the second year. At the end of second year, total amount would be = P(1+r)+P(1+r) * r = P(1+r)^2 After n years total amount = P(1+r)^n For the same interest rate r, after 6 months how much interest would have been accumulated? Half of the annual interest , that is Pr/2    If interest is compounded to principal semi-annually, at the end of first 6 months Total amont= P+Pr/2=P(1+r/2). For the next 6 months interest will be calculated on this. Interest =P(1+r/2)* r/2. Total amount at the end...

A bubble is characterized by rapid rise in asset prices, divorced from its fundamentals or intrinsic value. Many economists believe first recorded bubble happened in the year of 1636-37 in Netherlands. What could be the asset under speculation ? Was it Real estate/Gold/Diamond  at that point of time? No.  Craze for Tulip flowers engulfed the Netherlands starting from Nov 1636. In 3 months, prices sky-rocketed many folds before finally crashing down.  It is said that at the peak of the bubble, some Tulips were traded at price that was greater average house price in Amsterdam at that time. Sir Isaac Newton , the famous scientist , invested in a British company called South sea, which held exclusive rights to trade in South America in 18th Century. Initially he made some gains and exited the stock. But it flared up further and his friends were making a lot of money. It should be a humbling moment for him. So he purchased the stock again at a higher price. After some t...

United states of America has political and economic influence all over the world.With 33  crore people out of 759 cr world population(around 5%) its GDP is more than 20% of worlds GDP(Nominal not PPP). US Defence budget a year is almost equal to all other countries defence budgets put together. US spending on health care is more than India's annual GDP. In a Nation's economic well-being  two things play important role. Fiscal policy, Govt decides, deals with how Govt gets its money and spends. Second one is monetary policy, controlled by central bankers.Given the size of economy , policies in US not only affect US, but rest of the world as well, in the globalised world. Federal reserve which controls the monetary policy in US.Alan Greenspan was Fed Chairman for 18 years in US . A raise in interest rate, or a cut, could not only affect US but the entire worlds economy. During Clinton regime , US economy had a robust growth. When there is a good growth, the unemployment rat...

Quantity of goods and services  unit of money can purchase is defined as purchasing power of money. With 100$ people could purchase more items 20 years back than they can do now.(Ref  inflation calculator ) Inflation is defined as general rise of prices of goods and services over a period of time.In normal times, inflation occurs year after year and money loses its purchasing power. If you keep 100 $ in your shelf for 10 years, at 10% yearly inflation (Still some emerging economies have high inflation.Analysis will be simple to understand at 10%) it is worth only 35$ (100*(.9^10)).Inflation and purchasing power loss due to inflation is said to be biggest risk by investors. Say bank is providing 10% interest on deposit and the actual yearly inflationary expectation is 7%. What is the real returns we get? This 10% interest is called Nominal interest, as its not adjusted for inflation.If you need to adjust for inflation you will get real interest rate. Ni ...

Paul Volker, Ex chairman of US Fed in 2010, after financial crisis declared that the only useful financial innovation in 25 years was ATM that helped  people on the ground and others were of no use. He is the one who is credited for breaking the backbone of inflation in US as Fed Chairperson in early 80s. Robert Shiller, Nobel Laureate, tends to disagree. He says financial innovation is evolving and there could be some loopholes. It will get plugged as it evolves. Sure, the instruments are getting complex but we have sophisticated system to handle the complexity. He bats for more innovative products to plug the current loopholes. There are concerns expressed if top brains of a nation should be dedicated to finance industry in huge number rather than some other domain , say technology or healthcare. Any major project you can think of,   be it railways, hospitals etc,  is financed through equity/debt or held by Government. Even many privately held firm will have t...