SIMPLE AND COMPOUND INTEREST • Understand that wherever you spend your time

and money is a cost that you cannot spend

THE BASIC FINANCIAL CONCEPTS
elsewhere. The money spent on a car could be
Time Value of Money invested in the stock market. The car will decline
in value while the investments will thrive. Make
 By far the most important financial concept, each decision while paying attention to other
describes how important the value of time is in ways that you could spend or invest that money.
building wealth. Choose the opportunity that maximizes your
 Money invested today is worth more than long-term wealth.
money invested at any point in the future. That's
because it has more time to grow and Interest Rates
compound. It is also the main reason that you'll
• You must understand how interest rates and
want to get started with your investing as early
overall rate of returns affect almost everything in
as possible.
your financial life. For example, investing your
Diversify your Risks and Investments. money at 7% versus 5%, over 40 years, means
that you will have twice as much money, that's
 Another important concept to keep your right, twice as much money, for retirement. This
business finances balanced. Don't keep all of is also the precise reason that it is so important
your money in just a few assets like your house to lower your investment fees.
or your company stock. Make sure that you
spread your investments over many different Interest (TUBO)
asset classes. Also, make sure that if you hold a • Money paid regularly at a particular rate for the
lot of mutual funds, that they do not overlap, or use of money lent, or
you may not be diversified as you think. for delaying the repayment of a debt.
Compounding Effects of Money • It is the amount charged by the lenders to the
 Maybe the second most important basic borrowers/users of money, and is usually paid at
financial concept to understand. Understanding regular intervals
this is key to being able to forecast future Simple Interest
growth. Your money may grow at the same rate
each year in terms of percent, but in terms of • The charging interest rate based on a principal
actual dollar growth, compounding means that over number of years.
your money will grow faster and faster each year
• Simple Interest is charged only on the principal
as a result of earning money not just on your
amount. The following formula can be used to
investment, but also on the returns from that
calculate simple interest.
investment.
Is = P x r x t
Understand the Stock Market
where,
 A basic understanding of the stock market can
be applied to your everyday finances to help you P = principal amount
manage your business money better. Find out
r = interest rate per period
how understanding the stock market can help
you weather its highs and lows. After all, people t = the time for which the money is borrowed or
fear what they don't understand, and most lent or invested
beginners don't really understand the stock
market. Heck, even most advanced investors
don't understand the stock market.

Keep a Budget

• This basic financial concept is needed to really

understand the breakdown of your company’s
finances and to learn how to optimize them. If
there is one tool you use to keep your spending
in check and help you save money each month
and year, it should be a well-crafted budget
worksheet

Opportunity Costs
 Answer the following on a yellow paper and don’t forget
to include your computation.

Pedro Kamandag borrow P10,000 from Robert Buladoy

with an interest of 2% per month and payable for 5
months

How much is the total interest to be collected after 5

months?

Find the simple interest (With Computation)

Compute the compound interest (Make a table and

computation)

What is the principal amount on the 3rd month

How much is the interest rate they talk about?

Compound Interest
How much money does Pedro borrowed
 The interest in the first compounding period is
added on the principal, which will then be the
How much Would Robert Get in 5 months based on the
basis for the interest to be computed for the
money he lends to Pedro
next period
 Compound Interest is simply earning interest on
2.Mico borrow 20,000 pesos from Kim and they agree
interest. This means that the basis for the
that it will be payable for 5 years annually and the
computation of the applicable interest for a
interest is 5%
certain period is not only the original principal
but also the interest earned in the previous
How much is the total interest to be collected after 5
period.
years ?(Compound

Find the simple interest(With Computation)

Compute the compound interest ( Make a table and

computation)

What is the principal amount on the 3rd month

How much is the interest rate they talk about ?

How much money does mico borrowed ?

How much Would Kim Get in 5 years based on the

money he lends to Mico

3.Yesha invested 5000 pesos in an account paying 10%

compound interest annually, how much will be in the
account at the end of 10 years?

Compute the nearest answer and make a compound

table

4.Rhealyn invested 10,000 pesos in an account paying

10% compound interest yearly, how much will be in the
account at the end of 3 years? Compute the nearest
answer and make a compound table

Time Value of Money (Future and Present Value)

1.Activity! Find and Compunt the Compound Interst:
  The time value of money states that all things
being equal, a peso today is worth more than a
peso in the future. The peso you have today is
something that you can use now and earn
interest, while you cannot use a future peso.
 Analyzing time value of money aids the
managers and investors compare and contrast
present cash flows and cash flow in the future.
 Because money is a limited resource, you cannot
save and spend at the same time. If an individual Example 2:
decides to save his/her money, then he/she You invested P10,000 for 3 years at 9% interest rate.
gives up the opportunity to spend it. Good How much will you have after 3 years?
money management is needed, in personal life
and in business.

Future Value of Money.

Future Value is the amount to which an investment will

grow after earning interest. It is the principal plus total
interest earned over a stated period.

There are three (3) reasons why a peso today is worth

more than a peso in the future:

 Preference for present consumption -

Individuals prefer present consumption to future
consumption. In order to convince people to give
Present Value of Money.
up present consumption for future consumption,
there needs to be a strong incentive. For Present Value is the amount you have to invest today if
example, a businessman would be willing to you want to have a certain amount of cash flow in the
deposit money if he is assured that it will bring a future.
higher interest.
Finding the present value is the counterpart of finding
 Inflation – When there is inflation, the value of
the future value. This method is called discounting.
the currency decreases over time. The greater
the inflation, the greater the difference in value The formula for the present value is:
between a peso today and a peso tomorrow.
 Risk – If there is any uncertainty or risk
associated with the cash flow in the future, 𝑷𝑽 = 𝑭𝑽/(𝟏 + 𝒊)t
people will think it is better to spend their
money now. Where:

The formula for the future value is: 𝑃𝑉 = Present value

Where: 𝐹𝑉 = Future value

𝐹𝑉 = Future value in 𝑡 period 𝑖 = Interest rate

𝑡 = Time period

𝐹𝑉𝑡 = 𝑃𝑉 (1 + 𝑖)𝑡

𝑃𝑉 = Present value or the money invested today Example 3:

𝑖 = Interest rate How much should you invest today to get P12950.29 in 3
years time after investing in a security that yields 9%
𝑡 = Number of periods annually?

Example 1:

If you deposit P10,000 at 3% compounded annual

interest, how much will it earn in the second year?
 Future Value of an Ordinary Annuity

The Future Value of an Ordinary Annuity is the value

that a stream of expected or promised future payments
will grow to after a given number of periods at a specific
compounded interest.

The formula for computing Future Value of an Ordinary

Annuity is provided below:

1. You invested P210, 000 for 12 years at 9% interest

rate. How much will you have after 12 years?
2. Calculate the future value of P345, 723 after 7 years
assuming annual interest of 8%.

Example :

Mr. Mendoza wishes to determine how much the value

of his savings in 5 years will be if he will put P1,000 per
• Time Lines year in a bank which provides 7% interest per annum?

A time line, in business, is a graphical representation of

the timing of cash flows. It is an important tool in
analyzing the time value of money.

Example :

Assume someone decides to invest P125,000 per year

for the next five years in an annuity they expect to
compound at 8% per year. What will be the expected
• Annuities future value of this payment stream?

An annuity is a series of equal payments at fixed

intervals for a specified number of periods. Leases, bank
loans and rental payments are examples.

An ordinary annuity is the type of annuity wherein

payments occur at the end of the period. An annuity due
is the type of annuity wherein payments occur at the
beginning of each period. The two are illustrated in the
following time lines: Present Value of an Ordinary Annuity
• The present value of an ordinary annuity is the value of a
pool of future payments anticipated or agreed to be
discounted at a single equal value today. It can also be
considered as the amount you need to invest at a certain
interest rate today, so that at the end of the annuity,
when you withdraw an equal amount per period, the
original principal and all accrued interest will be fully
consumed.

• The formula for computing Present Value of an Ordinary Example :

Annuity is given:
Mr. Mendoza wishes to determine how much the value
• of his savings in 5 years will be if he will put P1,000 per
year in a bank which provides 7% interest per annum?

Example :

You are contemplating on purchasing a new laptop

which is worth P70,000 if you pay for the whole amount
today. The computer store also allows buyers to pay in
Example :
instalment requiring the buyer to pay P25,000 annually
at the end of each year for the next three years. You Assume someone decides to invest P125,000 per year
regularly invest your savings in a time deposit account for the next five years in an annuity they expect to
that provides an annual return of 5%. Will you avail the compound at 8% per year. What will be the expected
installment plan or pay the whole amount today? Which future value of this payment stream?
is the better option?

P68,081.25 is cheaper than the P70,000 cash price which

means you should pay through installment instead.
Simply adding the three P25,000 payments will lead you
to think that the P70,000 is cheaper but the more
relevant figure should be the present values of these
multiple cash flows.

Example :

Assume a person has the opportunity to receive an

ordinary annuity that pays P50,000 per year for the next
25 years, with a 6% discount rate, or take a P650,000
lump-sum payment. Which is the better option?
Example :

You are contemplating on purchasing a new laptop

which is worth P70,000 if you pay for the whole amount
today. The computer store also allows buyers to pay in
instalment requiring the buyer to pay P25,000 annually
at the beginning of each year for the next three years.
You regularly invest your savings in a time deposit
account that provides an annual return of 5%. Will you
avail the installment plan or pay the whole amount
today? Which is the better option?
 • Mortgage happens when a person pays off the debt
over time. FALSE; this refers to amortization.

• Amortization payments are all equal. TRUE; they are

comprised of equal periodic payments.

• Credit cards are usually amortized. FALSE; only car

loans, home loans, and personal loans are amortized.

• Interest costs are highest during the end of

amortization. FALSE; they are highest towards the start.
Example :
• Amortization payments are usually done semiannually.
Assume a person has the opportunity to receive an
FALSE; they are usually done monthly.
ordinary annuity that pays P50,000 per year for the next
25 years, with a 6% discount rate, or take a P650,000
lump-sum payment. Which is the better option?
Computing for Loan Amortization

LESSON 6 LOAN AMORTIZATION

Amortization happens when a person pays off a debt

over time with regular, equal payments. With each
payment (generally a monthly payment), a portion of the
money goes towards the interest costs and reducing the
loan balance.

At the beginning of the loan, the interest costs are high.

For long-term loans, the majority of each monthly
payment is an interest expense, and only a small amount Example:
is deducted from the loan. As time goes on, more
payment goes towards the principal and less on interest. You want to buy a phone for Php20,000. The dealer is
willing to sell it to you for 6% interest, payable in two (2)
The term loan amortization refers to the computation of years. He also expects you to pay off the phone monthly
equal periodic loan payments. These payments provide for this time period. What will your amortization
the lender with a specified interest return and schedule be?
repayment of loan principal over a specified period.
Given:
The loan amortization process involves finding out the
future payments, over the term of the loan, which will n = 12x2 = 24
pay the loan plus the interest. Lenders use the loan i = 6% = 0.06 (note that interest is on yearly basis)
amortization schedule to determine these payment
amounts and the allocation of each payment to interest 0.06/12 = 0.005 interest in a month
and principal. P = 20, 000
Another term associated with amortization is mortgage.
The mortgage refers to the debt that the borrower is
obliged to pay back.

Amortization is used for long-term loans.

Auto/car loans, home loans, and personal loans are

usually amortized loans. Credit card loans, however, are
not amortized.

Review Activity: True or False

 finances must go to paying off the debt. On the other
hand, a shorter amortization ends the debt quicker, but
will also have a higher regular payment.”

“A longer loan amortization period would usually mean a

longer time to pay and in smaller regular payments, but
there is also an increase in interest. Furthermore, having
a longer amortization period may constrain you from
buying whatever you want, since a portion of your