Presentation by GROUP 4 BUSINESS FINANCE

Basic long term

Financial

Concept
Presentation by GROUP 4 BUSINESS FINANCE

“Education is the passport to the future,

for tomorrow belongs to those who
prepare for it today.”
 Santa Isabel College

of Manila
GROUP 4 REPORTERS BUSINESS FINANCE

Ryza maceda John Daniel

Justin Bayanay
Madonna Beros
Quintano

Ayessa Gretel Serrano Reigne Ezpinoza

 Overview
Introduction Factors that may affect Loan Amortization
Interest Rate
Finance
Measurement of Interest Risk Return Trade
Importance Rate Off
Simple Interest
Interest Rate
Compound IInterest

Presentation by GROUP4 BUSINESS FINANCE

Santa Isabel College of Manila - Group 4

Introduction
Any financial instrument with a maturity of
more than a year, including public and private
equity instruments, bonds, leases, and other
types of debt financing, is considered long-
term finance.
 Finance
Obtaining capital or money for any form of
spending is known as finance. In order to finance
their operations, consumers, businesses, and
governments frequently lack the cash on hand to
spend, settle debt, or carry out other activities. As a
result, they must borrow money or sell shares.

Santa Isabel College of Manila - Group 4

Basic Long-Term Financial
Concept
Any financial instrument with a duration longer than a year,
including bank loans, bonds, leases, and other types of debt
financing, as well as public and private equity securities, is referred
to as long-term finance.

Importance of Basic Long-

Term Financial Concept
By lowering rollover risks for borrowers, extending the investment
horizon and boosting performance, and by expanding the
availability of long-term financial instruments, long-term financing
supports faster development, better welfare, shared prosperity,
and long-term stability.
Presentation by GROUP 4

Advantages of Long-Term

Financial
There are some major
Long-term financing decreases reliance on advantages of long-term loans:
any one source of funding and offers more Lower Interest Rate
resources and flexibility to fund different Limited Eligibility Criteria
capital needs. It also helps businesses to Hassle-free Application Process
spread out the maturities of their debt. Build Credit
Tax Benefits
Presentation by GROUP 4

Disadvantages of Long-
Term Financial
Your financial future may be impacted by the terms Here are few disadvantages of long-
of a loan taken out to pay for a purchase.
Installment payments that are lower than those for a
term loan that borrowers should be
shorter repayment plan must be made when aware of:
choosing long-term financing. Lower payments
provide advantages, but there are also Cash Flow
disadvantages. Consider the relative qualities of the Collateral Risk
terms you have available, and then decide if long- Credit Score
term financing is the best option.
Santa Isabel College of Manila - Group 4

Interest Rate
Earning on money lent and cost of
money borrowed are expressed as a
percentage of principal amount of
money lent or borrowed.
Presentation by GROUP 4

Interest Rate
INTEREST RATE INCREASES = DEMAND FOR MONEY DECREASES

FACTORS THAT MAY AFFECT

Interest may affect business decision be it
INTEREST RATE:
during the acquisition of funds (deficit). If INFLATION
the finance manager is considering to SAVINGS
EXPECTATIONS
INVESTMENT
invest their excess funds (surplus). MONETARY POLICY
DEMAND
INTEREST OR COMPENSATION THE BUSINESS CYCLE
MONEY SUPPLY
HIGHER THE RISK GOVERNMENT
AND DEMAND
BUDGET DEFICIT
 Measurement of
Interest Rate
1. Simple Interest 2. Compound Interest
CALCULATED ON THE PRINCIPAL AMOUNT AND ALSO ON
CALCULATED ON THE PRINCIPAL OR ORIGINAL THE ACCUMULATED INTEREST OF PREVIOUS PERIODS AND
AMOUNT OF LOAN. CAN BE REGARDED AS INTEREST ON INTEREST.
Formula: F = P (1 + i)^n

P = principal or present value

Formula: I = P x r
i = interest
p = principal or present value
r = interest rate per annum
I = periodic rate equal to r/m
r = interest rate per annum
m = number of conversion period per year
n = total of conversion period for the whole term = txm
t = term or length of loan or investment period

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

Simple Interest
It is calculated on the principal, or original amount of loan. You may observe that
bank charge higher interest to their loan products/services but give a minimal
amount of interest to their saving/deposit product/services.
For illustration let's assume that Mr. De Guzman placed P 100,000 in a special
deposit account with GSIS Bank for 1 year. At the end of the year, he deposit
received P 110,000.00. This 110,000 was loaned by Ms. Cruz an owner of Sari-Sari
Store. At the end pf the year Ms. Cruz paid the loan at 129,800.
Formula:
I=Pxr
where; i = interest
P = principal or present value
r = interest rate per annum

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

 i = 100,000 x 10%
i = 10,000
The first part of the example between Mr. De Guzman (surplus) and GSIS
Bank(intermediary) :
Interest = P 110,000 - P 100,000 = p 10,000/annum
Interest Rate = P 50,000/P 500,000 = 10%/annum
Mr. De Guzman earned 10% per annum paid by GSIS Bank
The second part of the example between the Bank (Intermediary) and
Mr. Cruz (Deficit):
Interest = P129,800 - P 110,000 = 19,800/annum
Interest = P 19,800/P 110,000 = 18%

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

Compound Interest
It is calculated on the principal amount and also on the accumulated interest of
previous periods and can be regarded as interest on interest. The more
compounding period there are, the higher will the future of your money. The
accumulated or compounded amount is presented by F, to compute for the F:

Formula: F = P (1 + i)^n
where, P = principal or present value
I = periodic rate equal to r/m
r = interest rate per annum
m = number of conversion period per year
n = total of conversion period for the whole term = txm
t = term or length of loan or investment period

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

 The time between successive interest computations is called COMPOUNDING PERIOD
or CONVERSION PERIOD. The number of conversion periods for one year is denoted by
m. While the total number of conversion periods for the whole investment term is
denoted by n. Conversion periods are usually experessed as exact divisions of year such
as monthly, quarterly, semi-annually, and annually. Take note that:
The total number of conversion period n would be :
n = t (m)
where; t = time
annually = m = 1 m= number of conversion periods
semi-annually = m = 2

quarterly = m = 4 Therefore, if we take 5 years as the time period, n would be like:

monthly = m = 12 annually = n = 5 (1) = 5
semi-annually = n = 5 (2) = 10
quarterly = n = 5 (4) = 20
monthly = n = 5 (12) = 60

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

 BUSINESS FINANCE

INTEREST RATE (r) = expressed as an annual and must be changed to

the interest rate conversion period or periodic rate denoted by i

Formula: i = r/m
where, r = interest rate per annum
m = conversion period per year
therefore, an interest rate (r) of 5% will yield a periodic rate of i =

If compounded annually i = 5% /1 = 5%
semi annually i = 5% /2 = 2.5%
quarterly i = 5% /4 = 1.25%
monthly i = 5% /12 = .42%

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

 BUSINESS FINANCE

Formula:
F=I+P
To compare compounded interest, we use the same example we us in simple
interest but this time 100,000 deposit placed by Mr. De Guzman will be
compounded yearly for 3 years.
1st yr = Interest = 100,000 x 10% = 10,000 (I) + 100,000 (P) = 110,000 (F)
2nd yr = Interest = 110,000 x 10% = 11,000 (I) + 110,000 (P) = 121,000 (F)
3rd yr = Interest = 121,000 x 10% = 12,100 (I) + 121,000 (P) = 133,100 (F)

COMPOUNDED INTEREST = used by banking industries in computing their interest in

saving deposit.
SIMPLE INTEREST = applied in loan acquisition

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

 Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

Loan

Types of Amortization
What is
Loan Amortization?
Amortizing Loan

The process of dividing a fixed-rate loan into equal payments is Auto loans
known as loan amortization. Each installment includes interest,
with the remainder going toward the loan principal. A loan
Student loans
amortization calculator or table template is the simplest way to Home Equity loans
calculate payments on an amortized loan. Minimum payments
can, however, be calculated manually using only the loan amount,
Personal loans
interest rate, and loan term. Fixed-rate mortgages

Amortized Loans Vs.

Amortized Loans Vs.

Unamortized Loans Unamortized Loans

Principal payments on an amortized loan are spread out

A borrower with an unamortized loan only has to make interest payments

over the life of the loan. This means that the borrower's
monthly payments are divided equally between interest
and loan principal. Monthly payments on an amortized loan
are higher than monthly payments on an unamortized loan
of the same amount and interest rate because the
borrower is paying interest and principal during the loan
term.
during the loan period. In some cases the borrower must then make a final
balloon payment for the total loan principal at the end of the loan term.
For this reason, monthly payments are usually lower; however, balloon
payments can be difficult to pay all at once, so it’s important to plan
ahead and save for them. Alternatively, a borrower can make extra
payments during the loan period, which will go toward the loan principal.
 BUSINESS FINANCE

Formula:
MA = Month A loan amortization table can also help borrowers:
ly

Amortizatio
n Calculate how much total interest they can save
P = principal
R = rate of in by making additional payments
terest
N = number o Reverse engineer a loan payment to determine
f items
Formula: MA how much financing they can afford
= P/{1-

(1+R)n/r Calculate the total amount of interest paid in a

year for tax purposes (this applies to mortgages,
student loans and other loans with tax-deductible
interest)

Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

Risk Return Trade off
Risk Return Trade off = High risk is associated with
greater probability of higher return and lower risk
with greater probability of lower return.
the potential for higher returns.
The risk-return tradeoff is an investment principle
that indicates that the higher the risk, the higher the
potential reward. To calculate an appropriate risk-
return tradeoff, investors must consider many
factors, including overall risk tolerance, the potential
to replace lost funds and more.
Presentation by GROUP 4
Risk return tradeoff is an investing term that
describes the relationship between the risk an
investor takes and the level of returns he realizes.
The two move in tandem: as risk increases, so does
The risk-return tradeoff is the trading principle that
links high risk with high reward. The appropriate risk-
return tradeoff depends on a variety of factors
including an investor’s risk tolerance, the investor’s
years to retirement and the potential to replace
lost funds.
Santa Isabel College of Manila - Group 4
Presentation by GROUP 4 Santa Isabel College of Manila - Group 4

Thank
You! Leader: Ayessa Gretel A. Serrano
Members:
Reigne Alexa I. Espinoza
John Daniel Quintano
Madonna Mitzi Therese D. Beros
Ryza Venice Maceda
Justin Bayanay