TIME VALUE OF MONEY

Principal P1000
Interest
Rate of interest 10%
Time period 1 year

Simple interest
I= PxR xT
I = 1000 x .10 x 1
I = 100

Sept 25, 2021 P1000 debtor -creditor P1000

Sept 25, 2022 P1100 1100

Payment= P +I
Interest-in-advance

BD = P x d x t
BD = 1000 x .10 x 1
Interest-in advance BD =100

Debtor 1000 Net Proceeds = P-BD 1000-100= 900

Creditor 1000

DEBTOR 900
CREDITOR 900
Payment = Principal

P1000 10% t= 90 days

I= 1000 x .10 x 90/360

I = P 25

Future Value
Present Value

Compound Interest
P1000
Interest rate10%
Term 2 years

Simple Interest
I = 1000 x.10 x 2
I = 200

FV = P (1+ i)n

PRINCIPAL P
r NOMINAL RATE
t term
compounding period n
annually 1
semi annually 2
monthly 12
weekly 52
daily 360 365

i=interest per period

i= nominal rate/compounding periods
n= number of compounding periods
n= term in years x compounding period

P=P5000
t=2 years FVIF = (1 + i)n
r=10%
compounded Annually

I= 5000 x.10 x 2
=1000
FV = 6000

i=.10/1 =.10
n=2 x1 =2
FV= 5000 (1 +.10)2
FV = 5000 ( 1.210000)
FV= P 605042
P= P20000
r=6%
term= 15 years
i = .06/2 =.03
n=15 x 2 = 30 periods
FVIF= (1+i)n = (1 + .03 ) 30
= 2.427262
FV = P48,545.24

PRESENT VALUE

PV = ____FV_______
(1+i)n
PVIF = ____1___
(1 +i)n

FV= P30000
t= 6 years r= 16%
compounded quarterly
i= .16/4 = .04 or 4%
n= 6 years x 4 = 24 periods
PV = 30000
(1 + .04)24
PV= 30000/2.563304
PV = P11,703.64

PVIF = 1_________
( 1 +.04)24
= 1/(2.563304)
=0.390121

PV= FV (1+i)-n
PV= 30000 (1+.04)-24
PV =30000 (0.390121)
PV = P11,703.64
ANNUITIES

FV ORDINARY ANNUITY

FVOA= Pmt x (1 + i)n -1

i
Pmt = P1000
r=12% compounded monthly
term 3 years

i=.12/12 =.01 n=3x12= 36

FVOA= 1000 x (1 + .01)36 -1
.01

FVOA= P43,076.88

PVOA= Pmt x 1- (1 + i)-n

i

Pmt = P10000
r=12% compounded monthly
t= 4 years

PVOA= 10000 x 1- (1 + .01)-48

.01

PVOA= P379,738.60

Sinking Fund

FVOA= Pmt x (1 + i)n -1

i

Sinking Fund Payment = FV x i_____

(1 + i)n -1
 FV =P1,000,000
12% interest compounded monthly for 5 years

Sinking Fund Payment = FV x i_____

(1 + i)n -1
SF payment = 1,000,000 x .01_________
(1 + .01)60 – 1
SF payment = P12,244.40

Sample 4.
A P40,000 debt is to be repaid at the end of 1 ½ years.
Interest charged is 15% payable at the end of the every 3
months. The debtor established a sinking fund that earns 12%
interest compounded quarterly.
a. Find the interest payment on the debt for each 3-month
period
b. Construct a sinking fund schedule.

Solution:
a. The quarterly interest payment for the debt is computed
using I= PRT or I = 40000 x .15 x 3/12= 1500
b. The size of each quarterly deposit in the sinking fund is
found using the prepared Table. This sinking fund is for 6
periods (1 ½ years x 4 period per year) at 3% per period
(12%/4 periods per year)

Sinking Fund Payment = FV x i_____

(1 + i)n -1

SF payment = 40000 x .03______

(1 + .03)6 – 1
SF payment= P6,183.90
Sinking Fund Schedule

1 2 3 4 5 6
At End of Interest Periodic Periodic Sinking Book
Period Income On Deposit in Increase in Fund Value
Sinking Fund Fund Accumulate P40000
(3-month
Fund d
interval) (2) +(3) -(5)
3% x (5)* (4) +(5)*
1 6,183.90 6,183.90 6,183.90 33816.10
2 185.52 6,183.90 6,369.42 12,553.32 27446.68
3 376.60 6,183.90 6,560.50 19,113.82 20,886.18
4 573.41 6,183.90 6,757.31 25,871.13 14,128.87
5 776.13 6,183.90 6,960.03 32,831.16 7,168.84
6 984.93 6,183.91** 7,168.84 40,000.00 0.00
Total 2,896.59 37,103.41 40,000.00

*Of the previous period. For example : 185.52= 6183.90 x 3%

**Correction for P1.00 discrepancy

Sample 2
The information in the columns of the sinking fund ca be obtained
directly, as illustrated in the following example:

1. The amount of the sinking fund at the end of the 4 th period.

Pmt =6,183.90 n=4 i= 3%
FVOA= Pmt x (1 + i)n -1
i

FV= 6,183.90 x (1 + .03)4 -1

.03
FV = 6,183.90 x 4.183627
FV= P 25,871.13
2. Sinking fund interest income for the 5th payment period.
5th SF interest income = FV 4th period x .03
= 25,871.13 x .03
= P776.13

3. Book value at the end of the 4th period

Book value 4th period = 40000- 25,871.13
BV = P14, 128.87