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Business Finance: Basic Long-Term Financial Concepts
Business Finance: Basic Long-Term Financial Concepts
Grade:12
2nd Semester Quarter III
WORKSHEET 1: List of Least Mastered
Competencies
Topics:
• Simple and Compound interest
• Effective Annual Rate
• Present value vs. Future value
• Loan and bond defined
• Loan agreement contents
• Effective method of amortization
• Amortization of bond issued at a discount
Story…
One day, the Master was going on a trip and decided to
entrust his wealth to three of his most trusted servants. The
wealth shall be given to each servant based on the Master’s
assessment of their talents. To his first servant, he entrusted
PHP500,000. To his second servant, believing that he can make
wise choices as well, he also gave an amount of PHP500,000.
Finally, he called on his third servant and gave him
PHP500,000. The Master then went on his journey and told
the servants he will not be back for a long time. Since the first
servant was a very smart person, he decided to invest the
PHP500,000 given to him. He was very pleased that he was
quoted a long-term investment for 5 years at 8 percent per
annum compounded annually, and decided to invest the
money in that institution.
The second servant saw what the first servant did and also
decided to invest the money. However, when given the choice by
the investment firm, he did not understand simple and
compound interest. In the end, he accepted the quote at 8% per
annum simple interest. The third servant saw them and thought
that they were being too much of a risk-taker and decided just to
keep the money locked in a vault in his home.
The Master returned after 5 years. He then called on the
servants and asked them what has become of the wealth he had
entrusted them. The first servant presented his PHP500,000 plus
the interest he earned worth PHP500,000 x (1.08)5 – 500,000 =
234,664.04 . The second servant presented his PHP500,000
along with the interest earned at 500,000 x .08 x 5 = 200,000
Lastly the third servant returned his PHP500,000.
Summary of their earnings
Servant 1 Servant 2 Servant 3
Simple Compound
Mr. Lopez wishes to find the effective annual rate for his
loan in BOD bank with a 5% nominal annual rate when
interest is compounded (1) annually; (2) semi-annually;
and (3) quarterly
Present Value vs. Future Value
Investment of PHP500,000 yielding an interest of 8% for a 5-year
period compounded annually
Therefore;
Future value is the amount to which an investment will grow after
earning interest
In contrast, the present value is the amount you have to invest today
if you want to have a certain amount of cash flow in the future
The future value is computed using compounding while the present
value is computed using discounting.
Loan/Bond
• A loan is money lent at an interest rate for a
certain period of time. Loans are normally
secured from different financial institutions,
the most common of which, are banks.
• A bond is also a form of loan, but can be
traded through Philippine Dealing and
Exchange (PDEX) System.
Loan Agreement Contents
• Amount of principal
• Maturity date and provision for repayment
• Term of the loan (lump sum, monthly, etc.)
• Grace period, if applicable
• Interest rates
• Loan/bond covenants (i.e. required ratios to be
maintained)
• Penalties for default
• Collateral documents, if applicable
• Let’s say that you are willing to invest a sum of
money that will yield PHP100,000 at the end
of year 1, what amount should you invest
today? If the investment earns 10%, then the
amount to be invested or the present value
should be equal to__________________
• Let’s say that you are willing to invest a sum of
money that will yield PHP100,000 at the end
of year 1, what amount should you invest
today? If the investment earns 10%, then the
amount to be invested or the present value
should be equal to____PHP90,909.09
Answer:
From the table (or by using the formula), the present value of annuity factor for
3 periods using 10% interest is 2.4869. Multiplying this factor by PHP10,000
provides a present value of interest payments of PHP24,868.6.
Present Value of a bond
95,082.68
105,242.14
2,720,779.89
4,308,869.40