CHAPTER 5: BASIC LONG-TERM FINANCIAL CONCEPTS
4 APPLYING BUSINESS CONCEPTS IN FINANCIAL AND
Time value of the money – a peso today, all things being
equal, has greater value than a peso in future because of
opportunity to invest peso today and earn interest
Opportunity cost – given up after choosing an option
Good money management – decision to invest either in
money market, fixed income securities, stock, bonds, rea
estate or small business
Annual interest – additional money earned from money
in account
Future value of the money – amount your original funds
will be worth in future, based on earning an interest over
time
 Aka compounding – makes money increase over
time given a certain period
FV = PV (1+i)n
Present value – today’s worth of future money
 Aka discounting
Simple interest rate – rate without compounding
Effective annual rate – compound interest earned, true
amount of interest
𝑖
FV = PV (1 + )nm
𝑚 investment
5.3 LOAN AMORTIZATION/INSTALLMENT LOAN
STEPS:
1. Know monthly rate  multiply to 12  add 1
2. Divide by 12 to get the monthly factor rate
3. MFR multiply to loan amount to get  amount
to be paid
4. Interest = MER (loan)
5. Payment – Interest = Principal
 Monthly factor rate – is used to determine the
amount of payment for the loan on a monthly basis
(principal plus interest)
 Monthly effective interest rate – determines the
amount of interest paid on the loan
5.
INVESTMENT PROBLEMS
 Conservative investors – usually older, more
mature, and have dependents or a family to take
care of
o Investment portfolio consists of money
market instruments, fixed-income securities
and bonds
 Stock investors – are more aggressive and young
investors
o Do not necessarily need a monthly income
 Combination of fixed-income and stocks – middle
aged with small family depending on him
 Real estate – “old school”/Wealthy families
o ADVANTAGES
1. Hedge against inflation – even when expenses goes
up, you will be saved
2. Rent income – regular cash flows
3. They are real and tangible properties, assets owned
by the investor or the business – can be sold
o DISADVANTAGES
1. Real estate are illiquid investments – cannot be
easily converted into cash
2. Although they offer some protection against
inflation, real estate investments may also
experience a decline in value – when inflation goes
down, everything goes down including the estate; he
call sell it for less that he acquired it
3. Lack of diversification – since they are expensive,
one can only invest in one or two properties which
loses the opportunity to acquire other types of
4. Management and operating expense issues come
with real estate investments – find good tenants and
incurring operating expenses
 Entrepreneur – start-up project is another
investment option
o Most risky choice for an investor
STATEMENTS OF BUSINESS
1. Balance sheet – shows assets of business and its
liabilities and the value of owner’s equity
2. Income statement / Profit and Loss statement –
shows if the business is earning
5.5 RISK RETURN TRADEOFF
 Risk-return Tradeoff explains that there is a
commensurate return for every risk a business
owner or investor takes and that the return expected
is usually greater for more risk taken (greater risk 
greater potential return)
 CHALLENGES
o International conflicts/events
o Extreme weather events
o Failure of national governance
o State collapse or crises
o Unemployment and underemployment
o Natural catastrophes
o Failure of climate change adaptation
o Water crises
o Data fraud / theft
o Cyber-attacks, computer hackers
CHAPTER 6: INTRODUCTION TO INVESTMENTS
 Inflation – value of money being reduced
o Silent thief – happens when there is a
general rise in prices of goods and
commodities
o If inflation rate I 10%, your money is losing
10% of its value
o Hyperinflation – excessive inflation; case of
Zimbabwe
 Investing – act of committing money or capital to an
endeavor with the expectation of obtaining an
additional income or profit
o Make money work for you
2. Bonds – safety of principal or capital and cash flow;
 Saving – just the act of putting away some money for
security that represents the debt of a gov’t or
future use
business promising to pay a fixed interest to the
holder of the bond for a definite period of time
6.1 DIFFERENT TYPES OF INVESTMENTS
1. Common stock – security that represent small pieces
of ownership in a business that trades in a stock
market
 Ownership/equity security
 Stock market – place where buyers and sellers
congregate to trade goods
 Stocks – small pieces of ownership being
traded in a business
 Primary market – market where businesses
needing additional financing to expand their
operations sell their shares to the investing
public for the first time
1. Initial Public Offering (IPO) – process of
selling shares for the first time; process of
“going public” and “listing on the exchange”
 Secondary market – first thing that comes into
mind when the word “stock market” is heard
 Stockholder – invests in stocks of a business
and is considered a part owner of the business.
This part owner is entitled to a portion of the
success of the business in the form of capital
appreciation and cash dividends
1. Cash appreciation – happens when the
current market price of the investment in
stock is higher than its purchase price. Results
in profit if the owner choose to sell it
2. Cash dividend payment – happens when
business pays out a portion of its earnings to
its stockholders
 Historically, stocks have generated the highest
return compared to other asset classes
o Warren Buffett – third richest person in
the world
 Inflation in PH – 4.23%
 Philippine Stock Exchange Index – posted return
of 11.71% from Dec 2006-2014
o 2006-2008 – negative inflation of -
20.76%
 Diversification – safety mechanism that protects
investors from magnifying the effects of their
investing mistakes;
o Have at least 15 stocks at any one time
 Benjamin Graham – 50 or three-year rule (sell
whichever comes first)
 Debt security – debt is prioritized over equity
 TERMS:
1. Bond issuer – borrower
2. Investor – lender
3. Coupon/coupon rate – interest rate
4. Term/tenor – time it takes for all payments to
be made by the issuer and received by lender
5. Face Value/Principal/Par Value – borrowed
amount
6. Bills – debt security that matures in a year or
less
7. Bonds – is a debt security that matures after a
year or more
8. Treasury – term that signifies that the debt
security is issued by the gov’t
9. Yield – return that you would expect if you
hold the bond for a year and is expressed in
percentage
 Selling at a premium – selling above its face
value
 Selling at a discount – selling below face value
  Market for bonds is defined by the negative
relationship between bond price and yield
TYPES OF BOND
1. Government bonds/treasury bonds – issued by
gov’t
- Low risk but still higher return
PH GOVT TYPES OF DEBT SECURITIES
1. Short-term treasury bill – 91, 182, 364 days
2. Fixed Rate Treasury Note (FXTN) – 5, 7, 10, 15, 20,
25 years
3. Retail Treasury Bond (RTB) – 3, 5, 7, 10, 15, 20 years
 Can be acquired for a minimum of Php5,000
All above are in PH pesos
4. ROP bond - Foreign currency-denominated bond
2. Corporate bonds - issued by businesses
 In applying for bonds, research about the
economic growth, fiscal situation and debt to
GDP ratio of the gov’t
 Invest in superior business; Study its annual
reports, financial statements, credit rating
3. Managed Funds – companies or trust funds that
pool money from various investors and through a
fund manager, invests the collected money in
stocks, bonds, or a combination of various
investments
- Instant diversification – as low as Php 5000
 In PH, managed funds could either be mutual
fund or Unit investment trust fund (UITF)
Both mutual funds and UITF’S classified as follows:
1. Equity fund – invests primarily in stocks
2. Bond fund (fixed-income fund / income fund) –
invest in bonds
3. Balanced fund – combination of stocks an bond
4. Money market fund – invest in short-term
securities representing high quality
Mutual fund – classified as a corporation
 Regulated by SEC
 PH regulation require mutual funds to invest a
min. of 5% of the fund’s net assets in liquid or
semi-liquid assets
 Investor is a stockholder
 Shares valued only once during Net Asset Value
Per Share (NAVPS)
UITF – trust fund
 Subject to stringent regulations imposed by BSP
 Investor not considered stockholder
 Shares valued only once during Net Asset Value
Per Unit (NAVPU)
 NAVPS and NAVPU are reported at the end of
business day (EOD)
Net asset value = asset – liabilities
GUIDELINES:
1. Look at long term track of fund (3yr and 5yr perf)
2. Read fund prospectus (mutual funds) and
Declaration of trust (UITFs)
Prospectus – document that contains information on the
objectives and policies of the fund
Declaration of trust – simply called Plan; same info
regarding UITFs
6.2 TYPES OF INVESTORS
1. Stock and bond investor – tend to be more aggressive
investor than the money market, fixed income investor
2. Real estate investor – desire to lock in money in real
properties to hedge against significant inflation
 Prefer gold
3. Business Entrepreneur
REASONS:
 To express creativity and talent
 Make use of personal skills and knowledge
 Practice self-management
 Achieve financial independence
 Tap unlimited opportunities and reach unlimited
financial benefits
Franchising – refers to the method of practicing and
using another’s perfected business concept
 Franchisee – granted the right to market product
owned by franchisor
CHAPTER 7: MANAGING PERSONAL FINANCE
Income - savings = expenses
“The ultimate purpose of money is to help others” – Bo
Sanchez
Needs - are the things that you need to survive
Wants - are the things that you want
Inflation – affects the value of savings and investments
Interest rate - the friend of savings and investments
Purchasing power - is the amount of goods and services
money can buy
Steps in surviving a crisis in Personal Finance
1. Set up an emergency fund
2. List all debts
3. Cut back on unnecessary spending
4. Pay off credit card debts
5. Apply for a credit line for emergency use
6. Talk to a financial manager
7. Monitor all your accounts’ cash flows
8. Trust that things will work out in time

Increasing opportunities for the Filipinos amid Global

Crises
Disasters - can bring in opportunities to discover what
solutions to calamities are available
“there is always opportunity in crisis” - Chinese
Calamities - have a way of softening people to the point
that usual business becomes more personal.