Basic-Long-Term-Financial-Concepts1

Objectives of Lesson 1

• Calculate future value and present value of money.

• Compute loan amortization using mathematical concepts and present value tables.

• Apply mathematical concepts and tools in computing finance and investment problems.

• Explain the risk-return trade-off.

Review Questions (True or False)

1. Interest represents the time value of money.

2. Compound interest is the product of the principal amount multiplied by the period’s interest rate.

3. Simple interest is the interest paid on both the principal and the amount of interest accumulated in prior periods.

4. Present value is the current value of a future amount of money, or series of payments, evaluated at an appropriate discount rate.

5. Amortization is the gradual extinction of a loan over some time using a sequence of regular payments towards principal and interest due at equal intervals.

Basic Long-Term Financial Concepts

Importance of Money Over Time

• "A peso today is worth more than a peso tomorrow."

Interest

• Interest: Excess of resources received/paid over the principal amount.

Simple Interest

• Definition: Simple interest = Principal amount × Interest rate × Time (period).

• Example of simple interest: If P10,000 is invested for 3 years at an interest rate of 9%, it will yield returns based on this formula.

Simple Interest Calculations

• Formula: I = P × r × t

  • I = Simple interest

  • P = Principal amount

  • r = Rate

  • t = Time/Period

Compound Interest

• Definition: Interest paid on the principal and the accumulated interest from prior periods.

• Example: Investment of P10,000 for 3 years at 9% compounded.

• Future Value Calculation:

  • Formula: FV = P(1 + i)^n

  • FV = Future Value

  • P = Principal

  • i = Interest rate per compounding period

  • n = Number of compounding periods

Future Value of Money

• Definition: The future value is the value of the present after 'n' time periods.

• Formula: FV = P(1 + i)

• Example: Calculation of FV for P1,000 compounded at 10% for 1, 2, and 5 years.

• Example 2: Determine the compound amount for P20,000 at 4% compounded semi-annually and quarterly for 2 years.

Present Value of Money

• Definition: PV = FV / (1 + i)^n

• Example: Calculating how much to invest today to buy a car priced at P1,400,000 in 2 years, compounded semi-annually at 20%.

Annuities

• Definition: A series of equal cash flows/payments.

• Formulas:

  • Ordinary annuity:

    • PV = R * (1 - (1 + i)^-n) / i

    • FV = R * ((1 + i)^n - 1) / i

• Example: Lump sum investment needed today to provide an ordinary annuity of P10,000 per year for 4 years at 6%.

• Annuity Due:

  • PV = R(1 + i) * (1 - (1 + i)^-n) / i

  • FV = R(1 + i) * ((1 + i)^n - 1) / i

  • Example: Present and future value for P50,000 paid annually at 10% for 3 years with first payment immediately.

PETA 1 (Personal Experience and Teaching Activities)

Individual Interview Exercise

• Interview young professionals (ages 21-29), adults with families (ages 30-39), and individuals aged 40-55.

Interview Questions

1. Lessons learned in 2024 regarding personal finances, including mistakes learned from.

2. Plans for 2025 to improve personal finance and financial goals.

PETA 2 (Group Project)

• Create a short video (1-2 minutes) advertisement on managing money in business.