Math of Investment Lesson 9 16
Math of Investment Lesson 9 16
Math of Investment Lesson 9 16
OF INVESTMENT
CBMEC 1
Academic Year: 2022-2023
First Semester
Prepared by:
JANE A. ATENDIDO, LPT, MBA, CSE
Lesson 9
ANNUITY DUE
You will calculate appropriate
unknown values using annuity due.
ANNUITY DUE
An annuity due is a
repeating payment that is
made at the beginning of
each period.
Ordinary Annuity vs.
Annuity Due
Ordinary Annuity
Timeline 0 1 2 3 4
Annuity Due
Timeline 0 1 2 3 4
i 1
PMT=PVdue −n
1−(1+i) 1+i
Formula for outstanding liability (k)
− n−k
1− 1+i
PV =PMT (1+i)
k(due) i
EXAMPLE 1
An investment of Php5,000 is made at the beginning of each
month for 3 years. If the interest is 12% compounded monthly,
how much will the investment be worth at the end of the
term?
Given:
PMT =Php5,000 r = 12%
t =3 m =12
n = 36 i =0.12/12 = 0.01
SOLUTION:
n
1+i −1
FV =PMT 1+i
n (due) i
1+0.01 36 −1
FV =5,000 1+0.01
n (due) 0.01
FV =Php217,538.24
n (due)
Ordinary Annuity
FVn =215,384.39
Annuity Due
FV =Php217,538.24
n (due)
Higher yield
EXAMPLE 2
Mr. Rio borrows Php300,000 from RAS Bank Inc. for the
renovation of his office. The bank charges a 6% interest
compounded quarterly. He repays the loan by regular
payments at the beginning of every 3 months. If the loan is to
be paid in 4 years,
PMT=Php20,915.79
300,000((0.015÷(1.015^(-16))(1÷(1+0.015))
b. To solve for the outstanding liability after (k)
10th payment,
− n−k
1− 1+i
PV =PMT (1+i)
10(due) i
− 16−10
1− 1+0.015
PV10 due = 20,915.79 1+0.015
0.015
PV =Php120,948.57
10(due)
20,915.79 ((1-(1.015)^(-6))÷(0.015)(1.015)
EXAMPLE 3
A mortgage of Php500,000 is to be paid by monthly
payments over a period of 3 years. If the rate of interest is 1 %
per month,
(a)how much is the monthly payment if made at the
beginning of each month?
(b)how much is the outstanding liability after the 20th
payment?
PMT=Php 16,442.73
500,000((0.01÷(1.01^(-36))(1÷(1+0.01))
b. To solve for the outstanding liability after the
20th payment
− n−k
1− 1+i
PV =PMT (1+i)
20(due) i
− 36−20
1− 1+0.01
PV20 due =16,442.73 1+0.01
0.01
PV =Php 244,422.01
20(due)
16,442.73((1-(1.01)^(-16))÷(0.01)(1.01)
Lesson 10
DEFERRED
ANNUITY
You will solve the appropriate
unknown values using deferred
annuity.
Deferred Annuity
A deferred annuity is an
annuity whose term does
not begin until the
expiration of a specified
time.
DEFERRED ANNUITY
1− 1+i −n
PVd =PMT(1+i)−d
i
1− 1+i −n
PMT=PVd (1+i) d
i
Present Value of Deferred Annuity
Timeline PMT PMT PMT PMT PMT
PVd =Php63,234.77
EXAMPLE 2
Let us now assume that all the conditions remain the same as
in Example 1 except that in this case the annuity payment is
supposed to be made at the beginning of each year.
Calculate the amount of money deposited today by David.
PVd =Php66,396.51
EXAMPLE 3
Mr. Sanchez purchased a new car for Php800,000 and made
a 40% down payment. The rest will be paid in a monthly
installment for 3 years, the first of which will start at the end
of 1 year. If money is worth 6% compounded monthly,
(a)how much is the monthly installment,
(b)how much is the remaining liability after the 10th
payment?
11 0.005
PMT=480,000(1.005)
1−(1+0.005)−36
PMT=Php15,426.05
480,000×(1.005^(11)) ×(0.005÷(1-(1.005^(-36))))
(b) To solve for the remaining liability after the (k)
10th payment
− n−k
−d 1− 1+i
PVkd =PMT 1+i
i
1− 1+0.005 −(36−10)
PVkd =15,426.05(1+0.005) −11
0.005
PVkd =Php355,192.16
Lesson 11
AMORTIZATION
You will prepare an amortization
schedule.
Amortization
refers to the process of
paying off a debt through
scheduled, pre-determined
installments that include
principal and interest
EXAMPLE
Joseph bought a handy cam worth Php36,999.00. The RAS
Photoshop charges interest on installment payment at 10%
compounded quarterly. If the handy cam is to be paid in 2
years,
(a) what must be the size of the quarterly payments?
(b) construct an amortization schedule,
(c) find the interest of the 4th payment, and
(d) find the outstanding principal after the 4th payment.
PMT=5,160.15
(b) To construct the amortization schedule
Outstanding
Payment on Repayment
Periodic Principal
Interest Principal
Period Payment 𝑂𝑃
𝑃𝑂𝐼 𝑅𝑃
𝑃𝑃 (𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑂𝑃
(𝑂𝑃 × 𝒊) (𝑃𝑃 − 𝑃𝑂𝐼)
− 𝑅𝑃)
0 P36,999.00
1 You may useP924.98
P5,160.15 the MS Excel for
P4,235.18 32,763.83
2 5,160.15 819.10 4,341.05 28,422.78
constructing/preparing
3 5,160.15 710.57
the amortization
4,449.58 23,973.20
4 5,160.15 schedule
599.33 4,560.82 19,412.38
5 5,160.15 485.31 4,674.84 14,737.54
6 5,160.15 368.44 4,791.12 9,945.83
7 5,160.15 248.65 4,911.50 5,034.33
8 5,160.15 125.86 5,034.29 0.00
Total P41,281.20 P4,282.20 P36,999.00
(c) The interest in the 4th payment is
lk =PMT 1− 1 + i −(n−k+1)
R r
A= , i=
i m
PV of Simple Perpetuity Due
R R
A=R+ or A= (1+i)
i i
PV of Simple Deferred Perpetuity
R 1−(1+i)−d R 1
A= −R or A=
i i i (1+i)d
EXAMPLE 1
If money is worth 12% compounded quarterly, find the
present value
a) of a perpetuity of Php9,000 payable quarterly
b) of an annuity of Php9,000 payable quarterly for 20 years
R 2,000
A=R+ =2,000+ =Php42,000
i 0.05
R 2,000
Or A= 1+i = 1+0.05 =Php42,000
i 0.05
EXAMPLE 3
If money is worth 8%, compounded quarterly, find the
present value of a sequence of payments of Php2,000 each,
a) at the end of 3 months forever;
b) at the beginning of each 3 months forever.
R 2,000
A= = =Php100,000
i 0.02
R 2,000
A=R+ =2,000+ =Php102,000
i 0.02
EXAMPLE 4
If money is worth 10%, obtain the present value of a
perpetuity of Php1,000 per year payable annually, with the
first payment due at the end of 6 years.
Given: R=Php1,000 i=0.1 m=1 r=10% d=tm−1=6(1)−1=5
−5
R 1−(1+i)−d 1,000 1− 1+0.1
A= −R = A= −1,000 =Php6,209.21
i i 0.1 0.1
R 1 1000 1
A= = A= =Php6,209.21
i (1+i)d 0.01 (1+0.01)5
You will prepare a sinking fund schedule.
SINKING FUND
EXAMPLE 1
In discharging its debt, Quitain Corporation foresees the need
to have P500,000 at the end of 2 years. To provide for this
amount, the corporation will create a sinking fund by
investing equal deposits at the end of each month at 6%
interest compounded monthly.
i 0.005
PMT=FV n = 500,000
1+i −1 1+0.005 24 −1
PMT=500,000 (0.03932061)
PMT=Php19,660.31
500,000×(0.005÷(1.005^(24)-1))
(b) To find the amount of the fund after 1 year
k 12
1+i −1 1+0.005 −1
FVk =PMT =19,660.31
i 0.005
FV12 =19,660.31(12.33556237)
FV12 = Php242,520.98
19,660.31×((1.005^(12)-1) ÷0.005)
(c) To find the interest to be earned on the 12th
deposit
I12 =P1,108.76
19,660.31×((1.005^(12-1)) −1)
Sinking Fund Schedule
Sinking Fund Schedule cont.
1 1
4,000×((1-(1+0.03^(-5))÷0.03)+(200,000÷(1+0.03^5))
Example 1 (Discount Bonds)
Interest on
Interest on Discount Change in the Book
Period Book Value at
Bond Amortized Value
Yield Rate
IBVY IB DA=BVY-IB Previous CBV+DA
190,840.59
1 5,725.22 4,000.00 1,725.22 192,565.81
2 5,776.97 4,000.00 1,776.97 194,342.78
3 5,830.28 4,000.00 1,830.28 196,173.07
4 5,885.19 4,000.00 1,885.19 198,058.26
5 5,941.75 4,000.00 1,941.75 200,000.00
Total 29,159.42 20,000.00 9,159.42
Table 1: Amortizing Bond Discount (below par)
The book value at the beginning of any period is simply the price at which the bond must be bought to
yield the investor’s rate.
You will solve depreciation using the straight-line method.
DEPRECIATION
Three Main Inputs Required To
Calculate Depreciation
Three Main Inputs Required To
Calculate Depreciation
Three Commonly Used Methods
To Calculate Depreciation
Straight-Line Depreciation
Method
Straight-Line Depreciation
Method
Example #1
Depreciation Table Using Straight-line Method
Book Value Annual Net Book Value
Year
(Beginning Year) Depreciation (End Year)
1 ₱ 100,000.00 ₱ 8,000.00 ₱ 92,000.00
2 92,000.00 8,000.00 84,000.00
3 84,000.00 8,000.00 76,000.00
4 76,000.00 8,000.00 68,000.00
5 68,000.00 8,000.00 60,000.00
6 60,000.00 8,000.00 52,000.00
7 52,000.00 8,000.00 44,000.00
8 44,000.00 8,000.00 36,000.00
9 36,000.00 8,000.00 28,000.00
10 ₱ 28,000.00 8,000.00 ₱ 20,000.00
Unit of Production Method
Unit of Production Method
Example #2
Lesson 15
Any question?
You will solve depreciation using the declining balance method..
Double-Declining method
When is the Double Declining
Method used?
How to Calculate Double
Declining Balance Depreciation
How to Calculate Double
Declining Balance Depreciation
The formula
Useful life = 5
SLD%= 1/5 = 0.2 or 20% per year
Depreciation rate = 20% × 2 = 40% per year
EXAMPLE 1
Depreciation for the year 2012
= 100,000 × 40% × 9/12 = 30,000
Depreciation for 2016 is 1,120 to keep the book value the same as salvage value.
15,120 – 14,000 = 1,120 (At this point, the depreciation should stop.)
Quiz: In 1 whole pad, compute for the following investment
opportunity. Show the given, solution and final answer.