Assumption

Before diving into any finance subject, you need to know one very basic, yet fundamental assumption, underlying in every aspect of finance you are going to study:

“Whenever you receive and have cash, you immediately deposit it in a bank to earn compound interest”

Yes. In reality, YOU might not be doing so. You could be keeping cash in your pocket or in a shelf. You might already be depositing cash in a bank, but are enjoying only simple interests and not compound interests.

However, in finance, you need to “assume” that you are depositing cash in a bank right away and start enjoying its compound interest since then.

You might wonder why most textbooks nor professors do not explain that? The answer is simple: Because in business, that’s what most companies are already doing so, meaning their “pockets (or shelves)” are their banks, hence putting any cash in a bank is as natural and daily routine as you putting cash in your pocket.

But one caveat is…in fact, the “bank” and the “interest” are analogies used to help your understanding for now. I will explain in more detail and with accuracy in later sections.