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Basic Long Term Financial Concept

1. The document discusses simple interest and compound interest, providing formulas and examples of calculating interest over time. 2. Compound interest is interest paid on both the principal and accumulated interest from prior periods, while simple interest is only paid on the principal. 3. Formulas are provided to calculate future value, present value, and examples are given to demonstrate calculating interest, principal, and totals over multiple time periods using compound versus simple interest assumptions.

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Carlo Katug
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44 views16 pages

Basic Long Term Financial Concept

1. The document discusses simple interest and compound interest, providing formulas and examples of calculating interest over time. 2. Compound interest is interest paid on both the principal and accumulated interest from prior periods, while simple interest is only paid on the principal. 3. Formulas are provided to calculate future value, present value, and examples are given to demonstrate calculating interest, principal, and totals over multiple time periods using compound versus simple interest assumptions.

Uploaded by

Carlo Katug
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Basic Long-Term Financial

Concepts
LEARNING OBJECTIVES

1. distinguish simple and compound interest.


2. solve exercises and problems in computing
for the time value of money with the aid of
present and future value tables.
Interest

•is the excess of resources (usually cash)


received or paid over the amount of
resources loaned or borrowed which is
called the principal.
•it is defined as the cost of using money over
time.
SIMPLE INTEREST
•is the product of the principal amount
multiplied by the period’s interest rate
(a one-year rate in standard).
The formula for simple interest is expressed by:
I = P x R x T,

Where:
I – interest;
P –Principal,
R – rate
Example 1: You invested P10 000 for 3 years at 9%
and the proceeds from the investment will be collected
at the end of 3 years. Using a simple interest
assumption, the calculation will be as follows:

Total
P 10, 900.00

P 11, 800.00

P 12, 700.00
COMPOUND INTEREST

•is the interest paid on both the


principal and the amount of interest
accumulated in prior periods.
For compound interest, use the formula
𝐹𝑉 = (1 + 𝑖)𝑛 (Equation 4.2)
where:
FV = Future Value
P = Principal
i = Interest rate per compound interest period or periodic rate
n = Time period or number of compound interest periods
Subtract the principal from the future value to get the compound
interest. Hence, Ic= FV – P.
• Example 2: Using example 1 where you invested
P10,000 for 3 years at 9% and the proceeds from the
investment will be collected at the end of 3 years,
compound interest will be computed as follows:
Year Principal Interest Cumulative Total
Interest

1 P10, 000
P10,000 X 0.09=900 P 900.00 P10,900.00

2 P10, 900
P10,900 X 0.09=P981 P 981,00.00 P 1,881.00

3 P11,881,.00
P11, 881 X 0.09=1,069.29 P1,0690.29 P12,950.29
FUTURE VALUE OF MONEY
To account for the time value for a single lump-sum payment, we use the same
formula provided for compound interest rates as shown on Equation 4.2

𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛 (Equation 4.3)

where, PV = Present Value


(1 + 𝑖)𝑛 = Future value interest factor (FVIF)*
The future value is the value of the present value after n time periods.
Example 3: Using the formula, find the future values of
P 1 000 compounded at a 10% annual interest at the
end of one year, two years and five years.
Example 4: Determine the compound amount on an
investment at the end of 2 years if P 20 000 is deposited at 4%
compounded a) semi-annually and b) quarterly.
PRESENT VALUE OF MONEY
• To get the present value of a lump-sum amount, we rearrange
Equation 4.2:

𝑃𝑉 = 𝐹𝑉(1 + 𝑖)−𝑛 (Equation 4.4)

where, (1 + 𝑖)−𝑛 = Present value interest factor (PVIF)* or discount


factor
Example 5: Jack would like to buy a car two years
from now using the proceeds of a 20% investment
that is compounded semi-annually. If the projected
price of the car is P1 400 000, how much money
must be invested today to earn the price of the car?
QUESTIONS?
A. Fill in the blanks of the table involving a
simple interest.
B. Complete the table for a compound interest involving
P 40 000 loaned for a period of 5 years with 6% interest
compounded annually.

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