Discussion Questions:

1. In your own words, and based mainly on the definition of finance as presented in this chapter,

explain the connection of finance and economics.

Economics is the study of the allocation of scarce resources while finance is the study of
“how people” allocate scarce resources. Finance basically came out from the concepts of
economics, because some financial concepts are based on economics. In economics, finance is
used to cite the specific rates, prices and even trends in markets. Finance and economics are
interconnected as the two inform each other, like in decision-making and the execution of it. The
economics is involved in decision-making process like on how to produce and distribute goods
or services and how it will be consumed by the public, then the finance will manage how to
execute the decision or plan that is made. Finance is also dealing with money (how the money
used to buy the goods and services), credits, investment and etc.

2. Briefly explain the importance of the three (3) pillars of finance. Why are they being studied in

finance?

(1) Time value of money is the idea that money that is available at the present time is
worth more than the same amount in the future, due to its potential earning capacity. This core
principle of finance holds that provided money can earn interest, any amount of money is worth
more the sooner it is received. One of the most fundamental concepts in finance is that money
has a time value attached to it. It is important because it allows investors to make a more
informed decision about what to do with their money.

(2) Asset valuation is the process of determining the fair market or present value of
assets, using book values, absolute valuation models like discounted cash flow analysis, option
pricing models or comparable. It helps to identify the right price of an asset especially when it is
sold, bought or offered. When there are two companies merging, asset valuation is important
because it helps both parties size up the business or organization.

(3) Risk management is the process of making and carrying out decisions that will
minimize the adverse effects of risk on an organization. It can help to save money and secure
the future of an organization; through the help of risk management the organization may avoid
the potential risk that may cause a lot of money for the organization and also it minimizes the
effects in the future. Risk management is one of the specialized areas of study within finance,
because this involves how organization and individuals limit their risk of loss due to
unpredictably of financial funds and changing markets.

3. Do you consider yourself risk-averse or risk seeker? Why do you say so?

Risk-averse is a person that hate or avoid risk, this kind of person will do everything that
s/he can do to avoid risk. While risk-seeker is a person who prefers to take risk or love thrills.
 From the two risk attitudes, I considered myself as a risk-averse person. In any situation
that I encountered which needs certain decision-making I prefer to be a risk-averse person, as I
afraid to take risk. I always have “what if’s” on my mind, or thinking for the possible outcome if I
choose to take risk, and a thought that I may not able to handle the situation when the risk
comes. Like when I see some products in online shopping that I need, sometimes even I really
need that product I decided not to order it, especially when I saw the review that some buyers
said that the product is not good, for me as long as you can it is better to buy in the market
physically where you can check the products condition personally than to buy online, which we
all know that there’s a high-risk in buying online. But in some situation, we can’t really avoid the
risk, in that kind of situation even I don’t like to face the risk, I just face the fact that I don’t have
choice but to accept it, learn to handle it and to solve the risky situation.