ATENEO DE NAGA UNIVERSITY

COLLEGE DEPARTMENT
S/Y 2020- 2021

Research on the following terms. Identify the formula if

applicable for each and in what case will you use such time value
of money. Give examples.

1. Simple interest
Simple interest is a fast method of calculating how much you
owe on a loan. The concept of simple interest is used in a number
of sectors, including banking, finance, and cars. When you pay a
loan, the monthly interest is removed first, then the remaining
balance is applied to the principal.

Formula:
SI= (P × R ×T) / 100
Where:
 SI = simple interest
 P = principal
 R = interest rate (in percentage)
 T = time duration (in years)
In order to calculate the total amount, the following formula is
used:
Amount (A) = Principal (P) + Interest (I)
Where,
Amount (A) is the total money paid back at the end of the time
period for which it was borrowed.
 
Examples:
Example 1:
Rishav takes a loan of Rs 10000 from a bank for a period of 1
year. The rate of interest is 10% per annum. Find the interest
and the amount he has to the payment at the end of a year.
Solution:
Here, the loan sum = P = Rs 10000
Rate of interest per year = R = 10%
Time for which it is borrowed = T = 1 year
Thus, simple interest for a year,  SI = (P × R ×T) / 100 = (10000
× 10 ×1) / 100 = Rs 1000
Amount that Rishav has to pay to the bank at the end of the year
= Principal + Interest = 10000 + 1000 = Rs 11,000
Example 2:
Namita borrowed Rs 50,000 for 3 years at the rate of 3.5% per
annum. Find the interest accumulated at the end of 3 years.
Solution:
P = Rs 50,000
R = 3.5%
T = 3 years
 SI = (P × R ×T) / 100 = (50,000× 3.5 ×3) / 100 = Rs 5250 
Example 3:
Mohit pays Rs 9000 as an amount on the sum of Rs 7000 that he had
borrowed for 2 years. Find the rate of interest.
Solution:
A = Rs 9000
P = Rs 7000
SI = A – P = 9000 – 7000 = Rs 2000
T = 2 years
R = ?
SI = (P × R ×T) / 100 
R = (SI  × 100) /(P× T)
R = (2000  × 100 /7000 × 2)  =14.29 % 
Thus,  R  = 14.29%

2. Compound interest
Compound interest is a concept that we all come with on a
regular basis. If we check our bank statements, we'll notice that
interest is credited to our account every year. Each year, the
interest rate on the same principal amount varies. Interest has
grown in recent years, as can be shown. As a result, we may
conclude that the bank's interest is compound interest, or CI,
rather than simple interest.

Formula:
Compound Interest = Amount – Principal
Where,
 A = amount
 P = principal
 r = rate of interest
 n = number of times interest is compounded per year
 t = time (in years)
It is to be noted that the above formula is the general formula
for the number of times the principal is compounded in a year. If
the interest is compounded annually, the amount is given as:
Thus, the compound interest rate formula can be expressed for
different scenarios such as the interest rate is compounded
yearly, half-yearly, quarterly, monthly, daily, etc.
R t
A = P (1+ )
100
 
Examples: 
Example 1: A sum of Rs.10000 is borrowed by Akshit for 2 years at
an interest of 10% compounded annually. Find the compound
interest and amount he has to pay at the end of 2 years.
Solution:
Given,
Principal/ Sum = Rs. 10000,  Rate = 10%, and Time = 2 years
From the table shown above it is easy to calculate the amount and
interest for the second year, which is given by-
R t
Amount(A2) = P(1+ )
100
Substituting the values,
10 2
A2=10000 (1+ )
100
10 10
=10000 ( )( )
100 100
=Rs.12100
Compound Interest (for 2nd year) = A2 – P = 12,100 – 10000 = Rs.
2,100
Examples 2: What is the compound interest to be paid on a loan
of Rs.2000 for 3/2 years at 10% per annum compounded half-yearly?
Solution: From the given,
Principal P=Rs.2000,
Time, T′=2×32 years = 3 years,
Rate, R′=102=5,
Amount, A can be given as:
R t
A = P (1+ )
100
5 3
A = 2000 × (1 +  )
100
21
= 2000 × ( )3
20
= Rs.2315.25
CI = A – P =  Rs.2315.25 – Rs.2000 = Rs.315.25

3. Fair market value

Fair market value is the price a business, property, or
other asset would sell for in an open and competitive market
where the buyer and seller have sufficient information about
relevant facts, a reasonable time to complete a transaction, are
not under any duress, are acting in their own best interests, and
mutually agree on the price.
Common Uses of Fair Market Value
 One of most prevalent applications of fair market value
is determining the value of tax-deductible
contributions. The Internal Revenue Service advises
against doing this work in a formulaic manner. The
attractiveness, usage, and scarcity of an item, as well
as the time interval between its purchase and donation,
must all be evaluated.
 Typically, determining the value of a property for the
purpose of calculating local property taxes includes
determining fair market values. When real estate must
be sold or split in divorce proceedings, fair market
value is also employed.
 Insurance claims, bankruptcies, mortgage applications
often require the use of fair market values, as does
estimating any taxes that may be due on inherited
property.
Example:
Let’s imagine a famous rapper teams up with a famous shoe
company to release limited edition designer sneakers. Expectedly,
this rapper’s fans are completely willing to forgo what would be
the fair market value and will pay exorbitantly more for the
shoes than they are worth, even when they know a sneaker is not
truly worth $500 or more. In this kind of scenario, the fair
market value is inflated to reflect the price the consumer is
willing to pay.

4. Present Value of 1
The present value discount rates for various combinations of
interest rates and time periods are listed in a present value of
1 table. To arrive at its current value, a discount rate from
this table is multiplied by a cash payment to be paid at a later
date. The table's interest rate might be based on the current
amount the investor is earning from other assets, the corporate
cost of capital, or any other metric.
Formula:
FV
Present Value=
(1+r )n
Examples:
Example 1: Thus, if you expect to receive a payment of $10,000
at the end of four years and use a discount rate of 8%, then
the factor would be 0.7350 (as noted in the table below in the
intersection of the "8%" column and the "n" row of "4". You
would then multiply the 0.7350 factor by $10,000 to arrive at
a present value of $7,350.
Example 2: Ian is considering investment online publishing
company and needs to work out the present value. He expects to
receive a cash flow of $100,000 after 4 years, at a 15% annual
return. Let’s work out the present value of this investment:
100,000
Present Value= = 57,175.32
(1+15 %)4
The current, present value of this investment is $57,175.32.
This means that if you invested this amount at 15% over four
years, you’d have $100,000.
So in this situation, if the investment into the company is
less that $57k, then it could be considered a good investment
because the cash flows will allow you to earn more than the money
is currently worth.
If Ian had to invest $70,000 to get this cash flow in four
years, it’s probably not a wise investment because he’s investing
more than the present value of the cash flow.

5. Present Value of an ordinary annuity

An ordinary annuity is a series of equal payments, with
all payments being made at the end of each successive period.
An example of an ordinary annuity is a series of rent or lease
payments. The present value calculation for an ordinary
annuity is used to determine the total cost of an annuity if
it were to be paid right now.
Formula:

P = PMT × ¿ ¿

Where:
 P = The present value of the annuity stream to be paid in
the future
 PMT = The amount of each annuity payment
 r = The interest rate
 n = The number of periods over which payments are to be made
Examples:
Example 1: ABC International has committed to a legal settlement
that requires it to pay $50,000 per year at the end of each of
the next ten years. What would it cost ABC if it were to instead
settle the claim immediately with a single payment, assuming an
interest rate of 5%? The calculation is:
P = $50,000 [(1 - (1/(1+.05)10))/.05]
P = $386,087
Example 2: ABC International is contemplating the acquisition of
a machinery asset. The supplier offers a financing deal under
which ABC can pay $500 per month for 36 months, or the company
can pay $15,000 in cash right now. The current market interest
rate is 9%. Which is the better offer? The calculation of the
present value of the annuity is:
P = $500 [(1 - (1/(1+.0075)36))/.0075]
P = $15,723.40
(In the calculation, we convert the annual 9% rate to a monthly
rate of 3/4%, which is calculated as the 9% annual rate divided
by 12 months. Since the up-front cash payment is less than the
present value of the 36 monthly lease payments, ABC should pay
cash for the machinery).

6. Present Value of an annuity due

The present value of an annuity due is the current worth of
a series of cash flows from an annuity due that begins
immediately. The payments from the annuity are distributed at the
beginning of each period. This is very similar to finding
the present value of an annuity with a few exceptions. 
Formula:
1−(1+ r)−n
PV= C × [ ¿ ×(1+i)
r
Where:
 C = cash flow per period
 r = interest rate
 n = number of periods
Example:
Mrs. Danielson is taking out a business loan requiring
payments of $5000 at the beginning of each month for 12 months.
The annual loan rate is 12%. Calculate the present value of the
annuity due. 
The interest rate is annual but payments are monthly, the
interest rate will need to be divided by 12. Hence, the rate we
will use in our calculation is 1%.
Number of Periods(n): 12
Cash value of annuity payments per period (C): 5000
Interest rate (r): 1% or 0.01
Present Value of an Annuity Due (PV): Unknown
1−(1+ 0.01)−12
PV= 5,000 × [ ¿ ×(1+0.01) = $56,838.14.
0.01

Using this equation, the present value of the annuity Mrs.

Danielson pays would be $56,838.14.
In this instance, understanding the present value of an annuity
due would help Mrs Danielson. She could see how the interest
charged would ultimately affect her. This might help her to weigh
out the cost versus benefit of a loan if she were considering
taking one out. 
If she had already taken the loan, this formula could help her to
understand the urgency of wanting to pay it off at a faster rate
to avoid the fees that come with the additional interest. 

7. Future Value of 1
Future value (FV) is the value of a current asset at a
future date based on an assumed rate of growth. The future value
is important to investors and financial planners, as they use it
to estimate how much an investment made today will be worth in
the future. Knowing the future value enables investors to make
sound investment decisions based on their anticipated needs.
However, external economic factors, such as inflation, can
adversely affect the future value of the asset by eroding its
value.
Types of Future Value
1. Future Value Using Simple Annual Interest
The FV formula assumes a constant rate of growth and a single up-
front payment left untouched for the duration of the investment.
The FV calculation can be done one of two ways, depending on the
type of interest being earned.
where:
 I=Investment amount
 R=Interest rate
 T=Number of years
For example, assume a $1,000 investment is held for five years in
a savings account with 10% simple interest paid annually. In this
case, the FV of the $1,000 initial investment is $1,000 × [1 +
(0.10 x 5)], or $1,500.
2. Future Value Using Compounded Annual Interest
With simple interest, it is assumed that the interest rate is
earned only on the initial investment. With compounded interest,
the rate is applied to each period’s cumulative account balance.
In the example above, the first year of investment earns 10% ×
$1,000, or $100, in interest. The following year, however, the
account total is $1,100 rather than $1,000; so, to calculate
compounded interest, the 10% interest rate is applied to the full
balance for second-year interest earnings of 10% × $1,100, or
$110.
FV=I× (1+R)T
where:
 I=Investment amount
 R=Interest rate
 T=Number of years
Using the above example, the same $1,000 invested for five years
in a savings account with a 10% compounding interest rate would
have an FV of $1,000 × [(1 + 0.10)5], or $1,610.51.

8. Future Value of an ordinary annuity

An ordinary annuity is a series of payments made at the end
of each period in a series of payments. A common financial
planning concept is to calculate the amount of money that will be
paid back to an investor on a future date if the investor makes
a series of payments prior to that date, assuming that the funds
are invested at a certain interest rate. Future value is the
value of a sum of cash to be paid on a specific date in the
future. Therefore, the formula for the future value of an
ordinary annuity refers to the value on a specific future date of
a series of periodic payments, where each payment is made at the
end of a period.
Formula:
¿
P = PMT × (1+r )n−1 ¿
r
Where:
 P = The future value of the annuity stream to be paid in the
future
 PMT = The amount of each annuity payment
 r = The interest rate
 n = The number of periods over which payments are made
Examples:
Example 1: The treasurer of ABC International expects to invest
$100,000 of the firm's funds in a long-term investment vehicle at
the end of each year for the next five years. He expects that the
company will earn 7% interest that will compound annually. The
value that these payments should have at the end of the five-year
period is calculated as:
P = $100,000 [((1 + .07)5 - 1) / .07]
P = $575,074
Example 2: What if the interest on the investment compounded
monthly instead of annually, and the amount invested were $8,000
at the end of month? The calculation is:
P = $8,000 [((1 + .005833)60 - 1) / .005833]
P = $572,737
The .005833 interest rate used in the last example is 1/12th of
the full 7% annual interest rate.

9. Future Value of an annuity due.

Future value of an annuity due is used to predict the future
value of a series of payments where the payment is made
immediately at the beginning of the payment period. The payment
at the beginning of the period is the main difference between an
annuity due and an ordinary annuity.
Formula:
( 1+ r ) n−1
FV= C × [ ¿ ×(1+r)
r
Where:
 C = cash value of payments made at the beginning of each pay
period
 r = interest rate
 n = number of payments
Example:
Michelle sees an ad for a 3 bedroom house available, listed
at $1800 per month. She wants to rent the property for three
years, but the rent is $9600 per year more than she is paying for
her rent now in her apartment. 
Before she signs a lease, Michelle wants to know how much
money she would have in three years if she were to stay in her
current home and invest the additional $9600 per year in an
account with a 5% annual interest rate. 
Given:
Number of Payments (N): 3 
Cash value of payments per period (C): 9600
Interest rate (R): 5% or 0.05
Future Value of an Annuity Due (FV): Unknown

We can apply the values to our variables and calculate the future
value of this annuity in 5 years.
Solution:
( 1+ 0.05 ) 3−1
FV= 9,600 × [ ¿ ×(1+0.05)= $31,777.20.
0.05

The formula can be broken down into the following steps:

1. 1 + 0.05 = 1.05
2. 1.05 to the 3rd power = 1.157625
3. 1.157625 – 1 = 0.157625
4. 0.157625 / 0.05 = 3.1525
5. 1.05 X 9600 = 10080
6. 10080 x 3.1525 = 31777.2
In this case, the future value of this annuity and the total cash
value of Michelle’s investment over the course of 3 years would
be $31,777.20.