How to Pass WGU C214 OA – Financial Management

Our research has pinpointed essential topics for the OA exam in this module. Dedicate time to thoroughly understand these topics before taking the exam. A deep comprehension of these subjects is crucial for excellent performance on the exam and for overall success in the course.

Annual Percentage Yield (APY):

The Annual Percentage Yield (APY) is a percentage measure expressing how much interest is earned in a year on a balance from an account or investment, considering the compound interest effect. This reflects the true return on investment over a one-year period, taking into account both the effects of compound interest and simple interest. In simpler words, interest in compound interest is calculated not on the actual amount, or what is known as the principal or original sum of money, but also on the interest that has been accumulating in prior periods. APY is a crucial basis for comparison between offered investment options or savings accounts, helping investors and savers to establish the actual value when comparing different offered options.

IRR – Internal Rate of Return: 

IRR (Internal Rate of Return) is one of the appraisal tools in financial management used to judge the profitability of the project. It indicates the rate of discount at which the net present value (NPV) of the investment becomes zero. Put in another way, IRR aids the investor in scrutinizing the estimated return from an investment since it mainly establishes the growth percentage that a project would likely be in a position to generate. A higher IRR, therefore, gives a more attractive investment opportunity, as it is the higher rate of return compared to the rate given in investment opportunities.

NPV – Net Present Value:

The Net Present Value (NPV) is a financial metric for evaluating the present worth by discounting back to the present value any investment’s cash inflows in a series of future cash flows at a given rate of discounting. This helps the investor to judge the question of whether an investment could result in a positive return and whether it’s worth pursuing. A positive NPV means the investment is assured of producing more cash inflows than outflows. It is, therefore, considered viable financially. On the other hand, a negative NPV values the investment at the current market price, indicating that the investment will make a loss and may hence not be advisable, unless there are other strategic reasons to pursue it. This aspect makes NPV part of the company’s consideration in decision-making and part of the capital budgeting process in making decisions regarding investments.

Time Value of Money (TVM):

Time Value of Money (TVM) is one of the important concepts that relate to either the principle of financing or any branch of finance and refers to money available today being more worthy than the same amount of money in the future either because of its earnings capacity or purchasing power. TVM assumes that the dollar to be received today can be invested in such a way that it earns interest or returns over time. Equally important, the fact that every dollar to be received at some future point in time is therefore worth less than the dollar received today because it is not received until some future date.

It lies at the base of most calculations of finance, such as estimating the present value of future cash flows, finding loan payments, and valuing investment opportunities. TVM principles allow individuals and businesses to make informed financial decisions by comparing the value of cash flows that occur at different points in time.

Understanding TVM helps investors measure not only how much they have made in an investment but also figure out what would be fair terms for a loan. This, therefore, implies that taking into consideration the time value of money allows both individuals and organizations to have the best financial strategies that ensure the best optimum value from the resources at one’s disposal in due time.

Bonds and stocks:

Bonds and stocks are the only two types of investments that can be available to an individual or a business in order to have money accrue towards reaching goals

Bonds: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. In bond markets, if an investor buys a bond, it is similar to a loaning transaction to the issuer for receipt of coupon payments and repayment of the principal amount at maturity. Generally, bonds will have fixed interests with a fixed date of maturity, so relatively, the case of forecasting an income stream that will be received over the life of the bond is easy. Most importantly, they are considered much safer investments than shares because they offer a fixed income that is well guaranteed by the issuer’s ability to pay the debt. However, it is after the change of interest rates and credit risks because it affects the market value of the bond.

Stocks: Stocks, also known as equities, represent ownership shares in a publicly traded company. Any investor purchasing such stocks becomes a shareholder of the respective company and thus enjoys part of the company’s profits through dividends and part-time benefits even if the stocks appreciate in future values. Unlike bonds, stocks are not fixed instruments, and their return usually continues to fluctuate with the price valuation, company performance, and market conditions and sentiment of the investor. Stocks, on the other hand, provide a chance for an increase in returns vis-à-vis bonds but, on the other hand, come with higher risks due to market fluctuation and, therefore, the possibility of loss of the principal investment.

Both bonds and stocks play crucial roles in investment portfolios, offering diversification benefits and different risk-return profiles. Investors often choose between bonds and stocks based on their investment objectives, risk tolerance, and time horizon. By carefully allocating their investment capital between bonds and stocks, individuals can build balanced portfolios that align with their financial goals and risk preferences.