2.

2 Present Value and Compound Discount

In economics and finance, present value (P) also known as present discount value is the
value of an expected income stream determined as the date of valuation. The present value (P) is
usually less than the final amount (F).
The present value is defined as the principal P which is invested for the given time t at a
given interest rate r, will amount F on the date F is due.
Compound Discount (D) is the difference between the final amount F and the present
value P.
Formula:
𝐹𝐹
𝑃𝑃 = 𝐹𝐹 (1 + 𝑖𝑖 )−𝑛𝑛 or 𝑃𝑃 = D=F–P
(1+𝑖𝑖)𝑛𝑛

**Discounting the final amount is the process of finding the present value.

Examples:

1. If money is invested at 12% compounded monthly, find the present value of P16,500.00
due at the end of 3 years and 6 months.
2. Discount P13,400.00 for 5 years and 2 months at 6% converted monthly.
3. A financial obligation of P35,500.00 is due on January 6, 2022. What is the value of this
obligation on July 6, 2015 at 9% compounded semi-annually?
4. If money is worth 6% compounded annually, find the present value of P60,600.00 due in
3 years and 2 months.

Exercise 2.2 – Solve the following problems and show your complete solution. Round
off your final answer to the nearest centavo.

1. How much should you invest today to provide your only son a brand-new Toyota car worth
P950,000.00 as a graduation gift 7 years from now if money is worth 8 ½% compounded
quarterly?
2. Discount P18,800.00 due at the end of 2 years and 9 months at 8% compounded quarterly.
3. If money is worth 6% converted semi-annually, find the present value of P125,500.00 due
at the end of 8 years and 8 months.
4. If money is worth 5% compounded monthly, find the compound discount if P43,400.00 is
discounted for 3 years and 3months.
2.3 Finding the Time
Time refers to the term of the investment, it can be solved using linear interpolation, but
this method is tedious, we apply logarithm:

log 𝐹𝐹�𝑃𝑃
𝑡𝑡 = � � ÷ 𝑚𝑚
log(1 + 𝑖𝑖)

Examples:

1. How long will it take P14,500.00 to amount to P16,100.00, if the interest rate is 4%
compounded quarterly?
2. Jane receives a loan P118,790.00 with interest at 7% compounded quarterly. She promises
to pay her creditor in full on the day P126,275 will be due. How long does it take for Jane
to pay the debt?
3. Jecka borrowed P9,250.00 from Jay with the agreement that the interest is charged at 8%
compounded monthly. If the maturity value of the loan is P11,500.00, when is it due?
4. Jomar deposits P100,000.00 in a savings account that pays 13% interest converted semi-
annually. If he decides to withdraw his money when it grows to P150,000.00, when should
he withdraw his money?

Exercise 2.3 – Solve the following problems and show your complete solution. Round
off your answer to the nearest hundredths (in two decimal places).

1. How long will it take P5,500.00 to amount to P16,500.00 if invested at 5% compounded

quarterly?
2. How long will it take for an investment of P24,540.00 to increase to P33,740.00 invested
at 4% compounded semi-annually?
3. Jomar received a loan of P40,000.00 from Ja with interest at 12% converted monthly. He
promises to pay Ja in full on the day when P72,000.00 will be due. When should Jomar
pay?
4. On January 6, Gabel has P200,200.00 in a fund which earns interest at 14% compounded
quarterly. He plans to go into business as soon as the fund contains P250,000.00. On what
date will the amount be available?
2.4 Finding the Rate
Finding the rate can be solved by linear interpolation, but the method is tedious, we apply
the formula:

𝑃𝑃 (1+𝑖𝑖 )𝑛𝑛
From 𝐹𝐹 = Divide both sides of the equation by P
𝑃𝑃
1�
�𝐹𝐹�𝑃𝑃 = (1 + 𝑖𝑖)𝑛𝑛 �
𝑛𝑛 Both sides of the equation raised to 1/n
1� Add both sides of the equation by the additive
�𝐹𝐹�𝑃𝑃 �
𝑛𝑛
= 1 + 𝑖𝑖 inverse of 1
1�
�𝐹𝐹�𝑃𝑃 �
𝑛𝑛
− 1 = 1 + (−1) + 𝑖𝑖 Since 𝑖𝑖 = 𝑟𝑟⁄𝑚𝑚
1� Then 𝑟𝑟 = 𝑖𝑖 × 𝑚𝑚
�𝐹𝐹�𝑃𝑃 �
𝑛𝑛
− 1 = 𝑖𝑖

1�
𝑟𝑟 = ��𝐹𝐹�𝑝𝑝�
𝑛𝑛
− 1� × 𝑚𝑚 × 100%

Examples:

1. P2,050.00 accumulates to P6,680.00 in 4 years. What is the interest rate compounded

monthly?
2. Find the rate compounded quarterly if P7,450.00 accumulates to P7,860.00 in 4 years and
9 months.
3. At what rate compounded semi-annually will P6,600.00 accumulate to P8,800.00 in 3 years
and 6 months?
4. For a sum of P9,500.00 to triple itself in 6 years and 6 months, what must be the rate of
interest compounded semi-annually?

Exercise 2.4 – Solve the following problems and show your complete solution. Round
off your answer to the nearest hundredths (in two decimal places).

1. At what rate compounded semi-annually will P3,500.00 accumulate to P5,700.00 in two

years and 6 months?
2. Find the interest converted monthly for an amount of P30,300.00 due in 3 years and 3
months whose present value of P8,800.00.
3. For a sum of P8,000.00 to double itself in 12 years and 9 months, what must be the rate of
interest compounded quarterly?
4. Spoti who invested P25,500.00 had P29,900.00 returned to him 4 years and 4 months later.
At what interest converted monthly did his money earn?