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Basic Long Term Financial Concepts

for abm student

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12 views40 pages

Basic Long Term Financial Concepts

for abm student

Uploaded by

manaloezekiel062
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BASIC LONG-TERM

FINANCIAL
CONCEPTS
A PESO FOR TODAY IS
WORTH MORE THAN A
PESO TOMORROW
Your father told you that he will entrust you
with the funds for your college education. He
gave you two options: a) receive the money
now in the amount of P 200 000 or b) receive
P 500 000 ten years from now. The investment
opportunity will provide you a 10% rate of
return. Which option would you prefer?
REMEMBER THIS?

SIMPLE INTEREST
COMPOUND INTEREST
ANNUITIES
INTEREST

• Interest is the excess of resources (usually


cash) received or paid over the amount of
resources loaned or borrowed which is
called the principal.
SIMPLE INTEREST

• Simple interest is the product of the principal


amount multiplied by the period’s interest rate (a
one-year rate in standard).
• Simple interest is usually applied to short-term
loans, where a sum of money, called the principal
amount, is borrowed.
1. Your mother invested P 18 000 in government
securities that yields 6% annually for two years.
2. Your father obtained a car loan for P 800 000
with an annual rate of 15% for 5 years.
3. Your sister placed her graduation gifts
amounting to P 25000 in a special savings
account that provides an interest of 2% for 8
months.
4. Your brother borrowed from your neighbor P
7 000 to buy a new mobile phone. The neighbor
charged 11% for the borrowed amount payable
after three years.
5. You deposited P5 000 from the savings of
your daily allowance in a time deposit account
with your savings bank at a rate of 15% per
annum. This will mature in 6 months.
COMPOUND INTEREST

• Compound interest is the interest paid on both the


principal and the amount of interest accumulated
in prior periods.
• Compound interest is when you earn interest on
the money you’ve saved and on the interest you
earn along the way.
FUTURE VALUE

• Future value is the value of an asset at a specific


date. It measures the nominal future sum of money
that a given sum of money is “worth” at a specified
time in the future assuming a certain interest rate,
or more generally, rate of return; it is the present
value multiplied by the accumulation function.
PRESENT VALUE

• Is the current worth of a sum of money that will


be received or paid in the future, discounted back
to the present value using a specific interest rate. It
reflects the idea that a dollar today is worth more
than a dollar in the future due to its potential
earning capacity.
ANNUITY

• An installment that requires a buyer to pay


equal payments at a certain period illustrates
an annuity –a series of equal cash flow –
payments in this case for a specific number of
periods.
ANNUITY

ORDINARY ANNUITY ANNUITY DUE


• If payment made and • If the cash flow happens
interest is computed at the at the beginning of each
end of each payment period, then it is called
interval, then it is called annuity due.
ordinary annuity.
Ordinary Annuity
Ordinary Annuity
Example: What lump sum would
have to be invested at 6%
compounded annually
to provide an ordinary annuity of P
10 000 per year for 4 years?
ANNUITY DUE
Example: If a supplier would allow
you to pay P 50 000 annually at
10% for 3 years with the first
payment due immediately, how
much would be the present value
and the future value?
LOAN AMORTIZATION

• Most housing and car loans are


amortizing loans that require the
borrower to pay that equal amount
either annually, semi-annually,
quarterly, or monthly.
NET PRESENT VALUE METHOD

• One useful application of the time value of money


is using the Net Present Value Method to
determine whether a project should be accepted or
rejected by al company. The basic decision rule is
to accept the project if the net present value is
positive and reject if it is negative.

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