Chapter 9- Basic Finance

Time Value of Money

Your peso today is worth more than your

peso tomorrow

i = Prt

Simple Interest Formula

Interest

is the amount of money that your principal should have earned given the rate of return in a given period

Principal

the money that you invest

Rate of Return

the prevailing market interest rate offered by the investment products

Time

return in a given period

Compound Interest

it is earning interest on interest.

Meaning, every month, the interest

that it accrues is based not only on

the principal, but also on the interest

that has already been earned in prior

month

Saving

amount of something (like time or money) that you do not need to use or spend, or money that you have saved, especially in a bank.

Emergency Fund

Sinking Fund

Two kinds of Savings

Investing

means to commit money or capital to a project or asset with the expectation of a financial return or profit.

Digital Banks

a type of bank with savings instruments and low risk financial product

Government bonds

an investment security, low-risk financial instrument, and fixed-income asset

Stock Market

This is where you can find high-risk investment, growth investment, and equity asset

Investment Portfolio

is the collection of Investment Asset

not putting all your hard-earned income to one type of investment

Diversification

spreading your income to different types- from banks to corporate bonds, government bills and other options.

Higher Risk = Higher Possible Return

RISK-RETURN TRADE OFF

SAVING → INVESTING → PORTFOLIO →

DIVERSIFICATION → RISK & RETURN

Flow of Investing

Financial Market help allocate resources in the economy

Recall

Investors use financial markets to predict the future of companies

Recall

The Stock Market influences which businesses grow or fail

Recall

Financial Market involve both opportunity and risk

Recall

EVEN OUT CONSUMPTION NEEDS

Financial markets help people

balance their spending and savings

throughout different stages of life

ALLOCATING RISK

Financial markets help investors

understand and manage investment

risks

BUSINESS MANAGEMENT

Financial markets guide businesses in

making important management and

investment decisions

ETHICAL PRACTICES

Financial markets encourage

businesses to follow ethical and

honest practices

The safer the borrower (like the government or a strong bank) and the shorter the term, the lower the risk

The _____ the borrower (like the government or a strong bank) and the _____ the term, the _____ the risk

the more complex the product, the

longer the term, or the more it depends on

exchange rates or volatile markets, the riskier it becomes

the more _____ the product, the

_____ the term, or the more it depends on

exchange rates or volatile markets, the _____ it becomes

Risk Tolerance

Time Horizon

Goals

Where should you invest depends mainly on? (enumeration)

High-yield savings accounts/digital banks

Pag-Ibig MP2 savings program

Short-term peso investment paper (t-bills)

Where to invest if you are very risk-averse (conservative)

Government bond funds or bond UITFS

Balanced funds/ balanced UITFS

REITS (real estate investment trusts)

Where to invest if you are moderate (balanced) enumeration

Local stock index funds or Equity UITFS (PSEI exposure)

Direct Stocks

Global Index Funds

Where to invest if you are okay with higher risk? (enumeration)

Investment

The current commitment of money or

other resources in the expectation of

reaping future benefits

Real Assets

these are physical resources used to produce goods and service

Financial Assets

represents ownership or claims on real assets

• Fixed Income Securities

• Equity

• Derivative Securities

FINANCIAL ASSETS ARE CLASSIFIED INTO THREE

FIXED INCOME SECURITIES

Financial assets that promise an even

and “fixed” percentage or amount of

return depending on the value of the

security you have purchased.

Equity

gives investors partial ownership of a company

DERIVATIVE SECURITIES

a financial assets whose value depends on another asset

Futures

Options

Swaps

Forwards

Types of Derivatives

Future Contract

agreement to buy and sell an asset for specific price at a given period of time.

it is standardized.

Options Contract

rights but not obligation to buy and sell assets to at a fixed price before a certain period

Swaps Contracts

Forwards Contract

private agreement, buy and sell at a fixed price of value TODAY.

you really have to speculate

Investments

these are assets purchased with the hope that their value will increase in the future

Investment Objectives

Available Funds

Level of Risk Tolerance

Investment Horizon

Accessibility of Funds

Taxation Treatment

Performance of the Treatment

Diversification

Key Considerations in Investment

Investment Objectives

Investment decisions are usually

based on a person's financial goal and

future plan.

Available Funds

Investors should only use money that

they can afford to set aside

Level of Risk Tolerance

Every investor has a different

willingness to take financial risks.

Investment Horizon

The length of time an investment is

kept can influence its potential growth

Accessibility of Funds

Some investments are easier to access or withdraw than others.

Taxation Treatment

Taxes may reduce the actual earnings

gained from investments.

Performance of the Treatment

The performance of an investment helps investors evaluate its profitability and stability

Diversification

helps reduce risk by spreading investments into different asset

FINANCIAL INTERMIDIARIES

Financial intermidiaries are

institutions that act middlemen

between people who save money and

people or businesses who need

money