TVM

r m EAR formula
A 6.60% DC 2 6.7089% (1+r/m)^m -1
B 6.70% SI ? 6.7000%
C 6.55% DC 12 6.7503% (1+r/m)^m -1
D 6.65% CC ? 6.8761% e^r-1

Notes
Discrete Compounding is the default formula
PV means the money is increasing
Annuity Due is always bigger than Ordinary Annuity since it starts first.
Simple Interest has the longest computation
Continuous Compounding has the shortest computation
 Annuities Timeline
Present Value Future Value
0 1 2 3 4
loans 5000 5000 5000 5000
insurance 5000 5000 5000 5000
PV FV
17,729.75 21,550.62

Solution
PV 17,729.75 4761.90 4535.15 4319.19 4113.51
17,729.75

FV 21,550.63
21,550.63
 5%

Ordinary Annuity
Annuity Due

Ordinary Annuity
 Valuen
Future Value interest = 8% 1.08
0 1 2 3 4
-800 200 600 400 -100

Solution
Cash Flows V2
-933.1200 216.0000 600.00 370.3704 -85.7339 167.5165

Shortcut to get each Valuen

143.61839 155.10785957 Given 180.91780741 195.391232

Valuen
Future Value Interest Rates
0 1 2 3 4 0-1
-800 200 600 400 -100 1-2
2-3
Solution 3-4
Cash Flows V4
-1038.81378 245.00325 690.15 430 -100 226.3395
 Notes
Always add 1 to interest
n in "Valuen" means any point of timeline
Negative Cash means "to pay" while Positive Cash means "to add"
npv (excel formula) is used to get the value 0
Do not round off decimals
Use discrete compounding before the reference/focal point/FV
Use discount after the reference/focal point/FV

Interest Rates
6% 106.00%
6.50% 106.50%
7% 107.00%
7.50% 107.50%
 Prob
Setup an amortization schedule for a $250,000 loan to be repaid in equal installments at
What percentage of the payment represents interest and what percentage represent

Soluti
Given: Loan To be paid in (years)
250,000.00 3

PMT Computation: PMT(Interest Rate, Period, -Amount of Loan)

Amortization Schedule
n Beginning Balance Interest Paid
0 250,000.00 0
1 250,000.00 25,000.00
2 174,471.30 17,447.13
3 91,389.73 9,138.97

Prob
You did some research about credit card installment rates for
Rates: Terms
6
How much monthly installment would you need to pay if you

Soluti
Given: Present Value To be paid in (months)
70,000.00 6

Long Cut Way (but I think its short cut)

Interest x Terms + 1 1.06
Answer/Terms 0.176666666666667 -

Amount x Factor Rate 12,366.67 -

Simple Interest Amortization Schedule

n Beginning Balance Interest Paid
0 70,000.00 0
1 70,000.00 700.00
2 58,333.33 700.00
3 46,666.67 700.00
4 35,000.00 700.00
5 23,333.33 700.00
6 11,666.67 700.00
 Implied Compounding Rate
Rate x Term x Total Amount x -Present Value 1.6907%
Answer x 12 20.29%

Ordinary Compounding Amortization Schedule

n Beginning Balance Interest Paid
0 70,000.00 0
1 70,000.00 1,183.47
2 58,816.80 994.40
3 47,444.53 802.13
4 35,880.00 606.61
5 24,119.94 407.79
6 12,161.06 205.60

Prob

It is now December 31, 2011, and a jury just found in favor of a woman who sued the cit
plus $100,000 for pain and suffering plus $20,000 for legal expenses. Her doctor testified
in the future. She is now 62, and the jury decided that she would have worked for anoth
assume that the entire salary amount would have been received on December 31,2010
payment for the jury award would be made on December 31, 2012. The judge stipulated t
using a 7% annual interest rate and using compound, not simple, interest. Furthermo
December 31, 2011, date. How large a check
Soluti
Given: Supposed salary in 2010 Will raise each year
34,000.00 3%

1/1/2010 12/31/2010 12/31/2011

Accident happened
Salary: 34,000.00 35,020.00
100,000.00
20,000.00
155,020.00
36,380.00
191,400.00
-
 Problem 1
an to be repaid in equal installments at the end of each of the next three years. The interest rate is 10% compounded annua
nterest and what percentage represents principal for each of the three years? Why do these percentages change over time?

Solution 1
Interest Rate
10%

100,528.70 - total payment to be paid each year

301,586.10 - total payment to be paid in 3 years
chedule
Principle Repaid Ending Balance Payment each year
0 250,000.00 Int Paid + Prin Repaid
75,528.70 174,471.30 100,528.70
83,081.57 91,389.73 100,528.70
91,389.73 - 0.00 100,528.70

Problem 2
about credit card installment rates for 6 months and found the following information for a local bank.
Monthly Rate (add on rate) Factor Rate Effective Interest Rate
1.00% 0.176667 20.29%
stallment would you need to pay if your used the card to purchase a new iPhone worth PHP70,000?

Solution 2
Using
Credit Card

nk its short cut)

Factor Rate - used to compute the installments

Total amount of installment payments

zation Schedule
Principle Repaid Ending Balance
0 70,000.00
11,666.67 58,333.33 -
11,666.67 46,666.67
11,666.67 35,000.00
11,666.67 23,333.33
11,666.67 11,666.67
11,666.67 -
 nding Rate
- Value of i
- Effective Interest Rate and Value of r

mortization Schedule -
Principle Repaid Ending Balance
0 70,000.00
11,183.20 58,816.80
11,372.27 47,444.53
11,564.54 35,880.00
11,760.05 24,119.94
11,958.88 12,161.06
12,161.06 -

Problem 3

d in favor of a woman who sued the city for injuries sustained in January 1, 2010 accident. She requested recovery of lost wa
or legal expenses. Her doctor testified that she had been unable to work since the accident and that she will not be able to
that she would have worked for another 3 years. She was scheduled to have earned $34,000 in 2010. (To simplify this prob
e been received on December 31,2010). Her employer testified that she would have received raises of 3% per year. The act
ember 31, 2012. The judge stipulated that the dollar amounts are to be adjusted to a present value basis on December 31,
mpound, not simple, interest. Furthermore, he stipulated that the pain and suffering and legal expense should be based on a
mber 31, 2011, date. How large a check must the city write on December 31, 2012?
Solution 3
Req. Pain and Suffering Req. Legal Expenses % will use (compound)
100,000.00 20,000.00 7%

12/31/2012 12/31/2013 12/31/2014

36,070.60 37,152.72 38,267.30

204,798.00 35,763.83
68,146.31 72,916.55
36,070.60
345,085.51 - total check for 12/31/2012
nterest rate is 10% compounded annually.
o these percentages change over time?

be paid each year

be paid in 3 years

% Interest %Principal
Int Paid/Total Payment Prin Re/Total Payment
24.87% 75.13%
17.36% 82.64%
9.09% 90.91%

for a local bank.

Effective Interest Rate
20.29%
th PHP70,000?

700 is 1% of 70,000 since its simple interest

 the bank will earn more here

dent. She requested recovery of lost wages

cident and that she will not be able to work
$34,000 in 2010. (To simplify this problem,
received raises of 3% per year. The actual
present value basis on December 31, 2012,
nd legal expense should be based on a

- Relevant cash flows to get the check for 12/31/2012

 Notes
Amortization Schedules - a formatted presentation of amount of interest and principal to be
paid over time if engaged in a loan from a bank or any financial institution. The data tells
you how much you will need to pay per peroid and how much you borrow principal
you are paying per period.

With factor rate, no need to do the amortization schedule (follow solution 2 short-cut)
and principal to be
. The data tells

n 2 short-cut)
 Notes
Stock Market a venue by which investors are able to buy and sell a share/stock
and to swap funds or digital ownership of a particular share/stock.
Primary Transaction IPO/Initial public offering; company owns a shares and investors
who want to invest on that shares.
Secondary Transaction involve individuals who own a stock and want to buy a share of stock.
Stocks/Share of Stocks proofs of ownership of corporate companies/evidence of ownership.
Listed Share/Trade Companies want to be listed in the Philippine stock market to:
1. To raise the capital.
2. To fund business projects.
3. To earn more shareholders.
Trading buy and sell stocks for short-term.
Investing buy stocks, waits to generate value for it, before selling for long-term
Price per share the last traded price.
Value per share computed.
*price and value are being compared to help investors decide.
Properly-Valued Value is equal to the price; However investor will not earn.
Under-Valued Value is bigger than the price; Investor will earn here.
Over-Valued Value is smaller than the price; However investor will not earn.
*Value is determined through expected cashflows (dividends/no div).
 During Computation
Dividend Growth Always add 1 in the given.
After # Years Always add 1 in the given.
Value Always use "NPV" in the computation.

Example Company with Dividends

Cashflow Periods 1 2 3 4 5 6
0.525 0.55125 0.578813 0.607753 0.638141 0.657285
9.389786 >future value
0.525 0.55125 0.578813 0.607753 10.02793
Last Dividend 0.5
Dividend Growth 5%
After 5 years 3%
Discount Rate 10%
Price ₱ 10.00 Over - Valued
Value ₱8.01 Do not Invest

Last Dividend 0.5 0.52

Dividend Growth 4% >forever
After 5 years
Discount Rate 10%
Price ₱ 10.00 Over - Valued
Value ₱ 8.67 Do not Invest

Last Dividend 0.5

Dividend Growth 0%
After 5 years
Discount Rate 10%
Price ₱ 10.00 Over - Valued
Value ₱ 5.00 Do not Invest

Example Company without Dividends

Free CFs Periods 1 2 3 4 5 6
1272 1348.32 1429.219 1514.972 1605.871 1670.106
23858.65 >future value
in millions 1272 1348.32 1429.219 1514.972 25464.52
Last Free CFs 1,200
Free CFs Growth 6%
After 5 years 4%
Discount Rate 11%
Number of Share 150.00
Outstanding Debt 200.00
Sum of PV FCFs ₱19,395.22
Price -
Value ₱ 127.97
>future value

>future value
 Notes
Fixed Income Instrument debt instruments that provide investors fixed returns.
Maturity (Time Horizon) the length of time before the debt intrument matures or exterminated
by the issuer.
Short-Term matures 1 year or less (bill/commercial paper); no coupons
Medium-Term matures 2-5 years (notes); pays coupon
Long-Term matures more than 5 years (bond); pays coupon; investing here is riskier

Issuers of FII: 1. Governments (treasury)

2. Corporations
3. Supernationals (it does not have national boundary)

Characteristics of FII: 1. Maturity

2. Coupon
3. Coupon Rate
4. Par Value/Face Value/Maturity Value of the instrument
- value that will be received as the last payment for the investor
Price not an fixed income because it always changes

Nature of FII: 1. Debt Obligation

2. Contractural
Two Parties: Issuer/Borrower vs. Investor/Lender
Price vs MIR they are always inverse in movements
when price is rising, interest is falling, vice-versa
Credit Rating shows how stable is the person/company/government, assess by
a third-party, highered by the issuer
Ex 3rd-Party S&P
Moody's
Fitch
Yield to Maturity specific interest rate that investor expects to earn if he/she
invests in bond/FII from the time that issued until maturity
tells you if the investor is earning money or lossing money
 During Computation
Coupon face value x coupon rate
paid mostly twice a year (semi-annual)
Annual Coupon will be determined once it is stated in the data
Price PV of all expected Cash Flows
Example # 1 of Long-Term Bond
6 yr. Bond, Face Value is 1000 Period (n) CFs
Coupon Rate = 8% 0
Coupon = 80 1 40
Periodic Coupon = 40 2 40
3 40
4 40
5 40
6 40
7 40
8 40
9 40
10 40
11 40
12 1040

Price
Market Interest Rate: 10% ₱911.37
8% ₱1,000.00
6% ₱1,099.54

Example # 2 of Long-Term Bond

15 yr. Bond, Face Value is 1000
Coupon Rate = 9.75% = 97.5
Annual Coupon Paying
Price
Market Interest Rate: 10.65% ₱934.01

Yield to Maturity (YTM) 10.0766%

Period (n) CFs

0
1 97.5
2 97.5
3 97.5
4 97.5
5 97.5
6 97.5
 7 97.5
8 97.5
9 97.5
10 97.5
11 97.5
12 97.5
13 97.5
14 97.5
15 97.5

Example # 3 of Long-Term Bond

Price = 1025 Period (n) CFs
0
15 yr. Bond, Face Value is 1000 1 97.5
Coupon Rate = 9.75% = 97.5 2 97.5
Annual Coupon Paying 3 97.5
4 97.5
Market Interest Rate: 10.65% 5 97.5
6 97.5
7 97.5
8 97.5
9 97.5
10 97.5
11 97.5
12 97.5
13 97.5
14 97.5
15 97.5
YTM 9.432%
 ation

emi-annual)
s stated in the data
ws
Term Bond
Explanations:
*periods = 6 years
*12th period is 1040 because we
will receive the face value back
*Since this is semi-annual,
MIR should be divided to 2

>price of the bond

>trading at a discount from face value
>price and face value should be the same
>trading at a premium

Term Bond

>coupon rate x face value

>amount to be generated for periods 6-15

done
done
done
done
Price = 980
Term Bond

done
done
done
done
Price = 980