Chapter 8 Financial Management

Learning Outcomes

In this lesson, students will be able to:

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compound interest.
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Introduction

In order to achieve the goals of investors or borrowers of getting certain amount of

money, it is necessary to learn the strategic process in controlling, acquiring, forecasting and
utilizing financial resources and this process is called Financial Management. It deals with
profit, interest, cash flows, loans and other business related areas.

Lesson 8.1. Simple and Compound Interest

The additional amount paid by the borrower on the use of money or the increase in the
invested principal is called the interest. The simple interest is where the amount of interest
earned is fixed over time. It is computed only on the principal. There are two types of interest,
the simple and compound interest.

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 A simple interest is computed by using the formula:
I = Prt
The future amount paid (F) with interest is:

F=P+I
F = P + Prt
F = P(1+ rt)

where: I = interest
P = principal (borrowed or deposited amount)
r = rate of interest in decimal(divide the given percent rate by 100)
t = time in year/s
F = final amount to be collected or paid after a period of time.

Manipulating the formula for solving unknown variables other than interest and final amount is
as follows:
I I I
Principal(P): I = Prt, P = , t= , r=
rt pr pt
F
Final amount(F): F = P(1+ rt), P=
1+rt
F−P F−P
F = P + Prt , r= , t=
Pt Pr

Illustrative Example 8-1

Mrs. De la Cruz was granted a loan with an amount of 20,000 PHP. after 1 year she paid
back to the investor the final amount of 25,000 PHP. a. How much is the interest? b. What is
the rate of interest?
Solution: P = 20,000; F = 25,000; t = 1 year; I = ?; r = ?
a. I = 25,000 – 20,000, I = 5,000 PHP

I 5,000
b. I = Prt , r = = ,
Pt 20,000(1)

r = 0.25(100%) , r = 25%

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 Illustrative Example 8-2

A certain lending company is offering 7.5% simple interest per annum for any amount of
loan. If an amount of 150,000 PHP is borrowed, how much is the interest in 3 years? What is
the total amount of loan after 3 years

Solution: P= 150,000 PHP, r =7.5%(0.075), t= 3 years, I=?

I = Prt = 150,000(0.075)(3),

I = 33,750 PHP

F = P + I = 150,000 + 33.750, F = 183,750 PHP

Illustrative Example 8-3

In order to have his own house, a man borrowed 550,000 PHP to be paid in 6 years at
an annual simple interest rate of 12%. How much interest will he pay if he will pay the entire
loan at the end of the 6th year? What is the total amount that he will repay?

Solution: P = 550,000, r = 12% = (0.12), t = 6 , I = ?, F =?

I = Prt = 550,000(0.12)(6)
I = 396,000 PHP

F = P + I 550,000 + 396,000
F = 946,000 PHP

Illustrative Example 8-4

A male sales representative borrowed a certain amount of money from a loan
company to buy a brand new car, to be paid after 5 years at 15% rate per annum. If he
paid a sum of 850,000 PHP. How much was the amount of borrowed principal?

Solution: F = 850,000, r = 15% = 0.15, t = 5 years, P = ?

𝐹
From the formula : F = P(1+rt) , P =
1+𝑟𝑡
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 850,000
P=
1+(0.15)(5)

850,000
P=
1.75

P = 485,714 PHP
Note: This example is similar to finding a simple discount which is a process of
finding the present value of the future or expected amount.

Illustrative Example 8-5

The principal value of an investment is 230,000 PHP from which a sum of 340,000 PHP
shall be collected from an investment rate of 8 % per annum. In how many years will it take to
pay the final amount?

Solution: F = 340,000, P= 230,000, r = 8% = 0.08, t =?,

𝐹
𝐹 𝐹 −1
𝑃
F = P(1 + rt) , 1 +r(t) = , rt = − 1, or t =
𝑃 𝑝 𝑟

𝐹 340,000 340,000
−1 230,000
−1 230,000
−1
t = 𝑃
𝑟
= =
0.08 0.08
0.478
t=
0.08
t = 5.98 or 6 years

Lesson 8.1.2. Two Types of Simple Interest

1. Ordinary simple interest. If the given time or period of payment for a simple
interest is expressed in days, the time interval is divided by 360.
number of days
t=
360

2. Exact simple interest. If the given time or period of payment for a simple interest is
expressed in days, the time interval is divided by 365 or 366 if it’s a leap year. In this

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 lesson, we will only consider 365 days or no leap year.

number of days
t=
365

For a period of time expressed in months, divide the number of months by 12

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠
t=
12

Illustrative Example 8-6

Find the exact interest and the final amount on 180,000 PHP at 10% for 200 days.

Solution: P = 180,000, r = 10%, t = 200 days

200
I = Prt = 180,000(0.1)(365), I = 9863 PHP
F= P + I = 180,000 + 9,863, F= 189,863 PHP

Illustrative Example 8-7

A businessman has 500,000 PHP at present. He wishes to increase the amount by 5 %
in just 200 days. At what rate must the money be invested based on ordinary interest?
Solution: P = 500,000, F = 500,000 + 5% of 500,000 = 500,000 + 0.05(500,000)

200
F = 525,000, 𝑡 = , I = F−𝑃 , I = 25,000, r = ?
360

𝐼 25,000 25,000
r=
𝑃𝑡
= 200 = 277,777.78
500,000(360)

r = 0.09 or 9%

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 Exercise 8.1

I. Consider simple interest and fill in the tables below.

I (PHP) F (PHP) P (PHP) r (in %) t (years)
125,000 5 3
7,000 62,000 5
12,000 150,000 6
1,200,000 7 7

II. Fill in the table below for simple interest in ordinary and exact number of days.

I (PHP) F (PHP) P (PHP) r (in %) T(days)

250,000 5 200(ordinary)
12,000 200,000 300(ordinary)
310,000 10 450(exact)
120,000 105,000 8 _____(exact)

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Lesson 8.2 Compound Interest

Compound interest is where the interest is added to the principal from the sum of a
loan or deposited amount to earn another interest. In other words, it is computed on both the
initial principal and the accumulated interest from preceding periods. It is compounded more
than once a year or each term per year and the term at which the interest is added to the amount
is called compounding period.
The Table Below Shows the Compounding Periods and Annual Conversion.

Compounding period Total conversion in

Period
(m) one year, n = mt

1 t
Annually
2
Semi-Annually 2t
4
Quarterly 4t
6
bi-monthly 6t
12 12t
Monthly

Formula for Compound Interest

𝑭
F = P(𝟏 + 𝒊)𝒏 , P =
(𝟏+𝒊)𝒏
𝐹 𝐹
ln(𝑃) log(𝑃)
n= , or n=
ln(1+𝑖)) log(1+𝑖))
𝐹 𝐹
ln( ) ln( )
𝑖 = ln −1
[ 𝑛
𝑃
] − 1, or 𝑖 = e [ 𝑥
𝑛
𝑃
]−1

Where: F = Final amount at the end of the year

m = number of conversion periods, t = time in years,
n = total number of conversion periods, n = mt
r = annual interest rate(per year)

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 r
i = rate per period or compound interest rate, i =
m
P = original principal or borrowed amount

Formula for Compound Interest with Compounding Periods

1. Annually (m =1): F = P(1 + 𝑟)𝑛
𝑟 2𝑡
2. Semi-annually (m =2): F = P(1 + 2)

𝑟 4𝑡
3. Quarterly (m =4): F = P(1 + 4)

𝑟 6𝑡
4. Bi-monthly (m = 6): F = P(1 + 6)

𝑟 12𝑡
5. Monthly (m = 12): F = P(1 + 12)

Illustrative Example 8-8

The sum of 120,000 PHP is invested at 10% annual interest. What is the final amount
and the interest after 3 years if compounded: a. semi-annually; b. quarterly, and c.
monthly.
Solution:
a. Amount compounded semi-annually,
m = 2; P = 120,000; t = 3 years; n = mt = 2t = 6; r = 10% or 0.1
𝑟 2𝑡
F = P(1 + 2)
0.1 6
F = 120,000(1 + )
2
F = 120,000 (1 + 0.05)6
F = 120,000 (1.05)6
F = 120,000 (1.34)
F = 160,800 PHP
I = 𝐹 − 𝑃 = 160,800 – 120,000
I = 40, 800 PHP

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b. Amount compounded quarterly,
m = 4; P = 120,000; t = 3 years; n = mt = 4t = 12; r = 10% = 0.1

𝑟 2𝑡
F = P(1 + 2)

0.1 12
F = 120,000(1 + )
4

F = 120,000 (1 + 0.05)12

F = 120,000 (1.025)12

F = 120,000 (1.3449)

F = 161,388 PHP
I = 𝐹 − 𝑃 = 161,388 – 120,000
I = 41.388 PHP
c. Amount compounded monthly,
m = 12; P = 120,000; t = 3 years; n = mt = 12t = 36; r = 10% = 0.1

𝑟 12𝑡 0.1 36
F = P(1 + 12) = 120,000(1 + 12 )

F = 120,000 (1 + 0.0083333)36

F = 120,000 (1.0083333)36

F = 120,000 (1.34818)

F = 161,781.6 PHP

I = 𝐹 − 𝑃 = 161,781.6 – 120,000
I = 41.781.6 PHP

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 Illustrative Example 8-9

An old employee wishes to have a double amount of his savings at the end of 5 years
in preparation for his retirement. At what annual interest must the money be invested in monthly
compounding periods.?

𝑟 12𝑡
Solution no. 1. By using formula from final amount compounded monthly , F = P(1 + 12)

W h e r e : m = 12; t = 5, F= 2P, m = 12, n = mt = 12(5) = 60

Substitute F = 2P and t = 5:
𝑟 12(5)
2P = P(1 + 12) , divide each side by P

𝑟 60
2 = (1 + 12) , take the “ln” or “log” of each side, and apply
𝑟
ln(2) = 60 𝑙𝑛 (1 + 12)
𝑟
0.693147 = 60 𝑙𝑛 (1 + 12)
𝑟
0.0115524 = 𝑙𝑛 (1 + 12), divide each side by 60

Take the inverse “ln”(𝑙𝑛−1) or ex of each side

𝑟
𝑙𝑛−1 (0.0115524) = 𝑙𝑛−1 (𝑙𝑛) (1 + 12) , cancel 𝑙𝑛−1 (𝑙𝑛)
𝑟
𝑙𝑛−1 (0.0115524) = 𝑙𝑛−1 (𝑙𝑛) (1 + 12), cancel 𝑙𝑛−1 (𝑙𝑛) to the right side of
equation
𝑟
1.011619 = 1 + 12 , subtract one(1) to each side
𝑟
0.011619 = , multiply each side by 12
12

r = 0.1394 (100%)
r = 13. 94 % or 14%

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Solution no. 2. By using formula for compound interest rate:
𝐹 𝐹
ln( ) ln( )
𝑖 = ln −1
[ 𝑃
] − 1, or 𝑖 = e [ 𝑥 𝑃
]−1
𝑛 𝑛

Substitute the given f =2P and n=m(t) = 12(5)= 60

2𝑃
ln( ) ln(2)
−1
𝑖 = ln [ 60
𝑃
] − 1 = ln−1 [ 60
]−1

ln(2) 0.69315
𝑖 = ln−1 [ ] − 1= ln−1 [ ]−1
60 60

𝑖 = ln−1 [0.0115525] − 1 = 1.011619 − 1

𝑖 = 0.011619
𝑟
Since 𝑖 = , then r = 𝑖(𝑚) , r = 0.11619(12)
𝑚

r = 0.1394 (100%) = 13. 94 % or 14%

Illustrative Example 8-10

Mr. Emdee Fetalver borrowed money with the sum of 250,000 PHP to be paid back with
an annual interest of 12% compounded quarterly. How long will it take to pay the final amount
320,000 PHP?

𝑟 0.12
Solution: P = 250,000, r = 12%(0.12), m = 4 (quarterly), 𝑖 = = = 0.03
𝑚 4

F=320,000, t =?

𝐹
ln( ) 𝑛
Formulae: n = 𝑃
, n = mt, t =
ln(1+𝑖)) 𝑚

320,000
ln(250,000) ln(1.28)
n= =
ln(1+.03)) ln(1.03)

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 8.35
n = 8.35 , t= = 2.09
4

t = about 2 years and 1 month.

Exercise 8.2 Solve the following problems.

1. Mrs. De Guzman deposited 300,000 PHP in her bank account. How much money does
she have in the account 5 years later if the account pays 3 % annual interest compounded
monthly?

2. What is the final amount of 550,000 PHP to be paid at the end of 8 years, with an
annual interest of 12% compounded (a) semi-annually, (b) quarterly, and (c) monthly?

3. How long will it take to pay the amount of 170,000 PHP if the principal is 125,000 PHP
at an annual rate of 15% compounded bi-monthly?

4. At what annual rate and periodic rate must a 550,000 PHP be invested compounded
monthly to earn a sum of 820,000 PHP after 5 years?

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Lesson 8.3. Credit Cards and Finance
Credit card also known as plastic money, is one of the in-demand products nowadays. It is
a personal loan to finance or purchase consumer’s many type of expenditures. The lender or
issuing bank also entitles the cardholder to borrow cash or funds based from the specified limit
of cash withdrawal. It is a revolving credit that can be used anytime when the loan is paid back
with principal plus the interest which is usually on monthly basis of payments before the due
date.

Definition 8-1
The definitions relative to credit cards from R.A. 10870, 16th Congress of the Philippines.
Credit card refers to any card or other credit device intended for the purpose of obtaining money,
property, or services on credit.
Credit card issuer refers to a bank or a corporation that offers the use of its credit card.
Credit card limit refers to the maximum total amount for purchases, cash advances, balance
transfers, and finance charges, service fees, penalties, and other charges which can be charged
to the credit card.

Default or delinquency refers to the nonpayment of, or payment of an amount less than, the
minimum amount due or minimum payment required, or words of similar import for at least
three (3) billing cycles.
Finance charges refer to the interest charged to the cardholder on all credit card transactions in
accordance with the terms and conditions specified in the agreement on the use of the credit
card.

Installment purchases refer to transactions wherein payment for which is amortized in parts
over a fixed period.

Minimum amount due or minimum payment required refers to the minimum amount that a
cardholder is required to pay on or before the payment due date for a particular billing cycle or
billing period which may include one (l) Outstanding balance multiplied by the required
payment percentage or a fixed amount, whichever is higher.
Outstanding balance refers to the amount to be repaid as of statement cut-off date.

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Advantages and Disadvantages of Using Credit Cards

There are several types of credit cards such as: Reward credit card, Business credit card,
Travel credit card, Student credit card, Co-branded credit card, Secured credit card, to name
just a few. The use of credit cards has con and pros, and the following are some of the
advantages:
1. Earning reward points for cash back, where the cardholder earns back percentage when used
for spending or purchase of any item. The reward points earned depend on the reward system
by the issuer, seller or company accepting credit cards for payment.
2. It is more convenient to carry than cash money when buying goods or services.
3. The card is safe and has fraud protection when stolen or lost, by just calling or informing the
credit card company and the issue can easily be resolved by blocking the access or use of
card.
4. Credit card is universally accepted, meaning it can be used anywhere as long as there is
available account balance and the card is accepted and recognized by the seller.

Disadvantages of Using Credit Card

1. The card holder is tempted to become careless or irresponsible buyer, because the card is
easy to use, hence, easy to overspend.
2. Paying interest either in full or installment for loans.
3. The card holder pays annual fees for service charges.
4. Additional fees will be charged by the issuer to the cardholder for failure to pay on due
date.
5. The card holder will be charged either the minimum payment or an amount lower than
monthly due.
6. Other low interest rate offers are just temporary, and the cardholder may end paying
unexpectedly higher interest than what is specified in the policies.

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 Finance charges in Credit Card

To determine the finance charge, use the formula for simple ordinary interest:

𝑡(𝑑𝑎𝑦𝑠)
I= 𝑃(𝑟) [ ]
360

𝑁(𝑑𝑎𝑦𝑠)
𝐹𝑐 = (𝐴𝐷𝐵)(𝑅) [ 360 ],
Where: 𝐹𝑐 = finance charge, R = annual rate ( r x 12), t = time in days

∑(𝑈𝐵)(𝑛)
ADB (Average daily balance) =
𝑁

UB= unpaid balance, n = no. of days until balance charge,

N = total number of days until balance charge.

Illustrative Example 8-11

Mr. Honorio, utilized his credit card on the purchase of a product worth 5,000 PHP on
December 10, 2023, 3,000 PHP on December 16, 2023, and 4,000 PHP on December 25, 2023.
The amount due on previous trasaction is 15,000 PHP and the due date was December 1, 2023.
On the same day of due date, he paid the issuer an amount of 1,000 PHP. only. If the average
is 3% per month, what is the finance charge on the next billing date which is on February 1,
2024.
Solution: The transaction data is as follows

Statement date: January 1, 2024

Previous statement date: December 1, 2023
Amount due(previous balance): 15,000 PHP.
Minimum payment on due date: 1,000 PHP.
Due date: January 5, 2024
Amount paid on due date: 8,000 PHP.
Finance charge: 3%/month

First purchase after previous billing statement : Dec. 10, 2023, amount is 5,000 PHP.
Second purchase after previous billing statement : Dec. 16, 2023, amount is 3,000 PHP.
Third purchase after previous billing statement : Dec. 25, 2023, amount is 4,000 PHP.
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 Table for Computation of unpaid balance

Date Payment and Unpaid No. of days from (UB)•(n)

purchase balance(UB) Unpaid balance(n)
Dec. 2-10 15,000 9 135,000
Dec. 11-16 5,000 20,000 6 120,000
Dec. 14-25 3,000 23,000 12 276,000
Dec.26- 4,000 27,000 9 243,000
Jan.4
Jan. 5 −8,000 19,000
Total N= 36 ∑(𝑈𝐵)(𝑛) =
774,000 PHP

The first interval on dates starts from the day after the previous billing statement to the
date of first purchase or payment, and the second from the date after first purchase to the the
date of second purchase, and lastly, from the date after the last purchase to the day before due
date.

∑(𝑈𝐵)(𝑛) 774,000
ADB (Average daily balance) = = = 21,500
𝑁 36
R = r(12) = 3(12) = 36% or 0.36

𝑁(𝑑𝑎𝑦𝑠) 36
𝐹𝑐 = (𝐴𝐷𝐵)(𝑅) [ ] = 21,500(0.36) [ ]
360 360

𝐹𝑐 = 774 Php – finance charge

The total bill for the next billing statement which is on Feb. 1, 2024 is

A= current unpaid balance(UB) + 𝐹𝑐

A = 19,000 + 774 = 19,774 PHP

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 Illustrative Example 8-12

Referring to Example 1(credit card), how much is the total bill for the next billing
statement of Mr. Honorio if he paid the amount of 8,000 PHP one week after the due date?
Solution:
A= current unpaid balance(UB) + 𝐹𝑐 + 𝐿𝑐
n(no.of days delayed payment)
Where : Lc = charge for late payment= (UB)(R) [ ]
360

n = 7 (1 week) , UB= 19,000, R= 0.36

7
Lc = charge for late payment = (19,000)(0.36) [360] = 133 PHP

A= current unpaid balance(UB) + 𝐹𝑐 𝐿𝑐

A = 19,000 + 774 + 133 = 19,907 PHP

Exercise 8-3

1. Find the finance charge on a certain credit card accouunt and the total
amount due on the next billing:

Statement date: May 1, 2024

Previous statement date: April 1, 2023
Amount due(previous balance): 12,000 PHP
Minimum payment on due date: 500 PHP
Due date: May 7, 2024
Amount paid on due date: 6,000 PHP
April 10, 2024: purchased 2,000 PHP
April 15 , 2024: purchased 2,500 PHP
April 21 , 2024: purchased 6,000 PHP
Finance charge: 2%/month

2. Determine . the total bill for the next billing statement if the amount of 8,000 PHP is
paid ten days after the due date.

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Lesson 8.4
Annuity is a stream of cash flow for long term payment or investment where the
sequence of periodic payments and interval are equal with the same interest rate. The term
annuity is from the Latin word annus, meaning “year.” An equal payment is paid in yearly basis;
however, other terms used in different compounding period are possible. Annuity has a variety
of applications in real-life situations such as borrowed money or loans to buy property, car and
appliances where the annuity is certain or the number of payments are known, while for
contingent annuity uncertain are the pensions from retirement policies, and life or accident
insurance. There are several types of annuities, but this lesson focuses only on simple annuity.
The other types of annuity shall be discussed in other subjects such as business mathematics
or financial management.

Types of Annuities and Definitions

A. Annuity according to duration of payments

1. Annuity certain is the amount of payment that begins and ends at a specific length of time.
2. Annuity uncertain or contingent annuity is the amount of payment
which depends on a certain specified event

B. Annuity according to dates of payments

1. Ordinary annuity is an annuity where the series of payments are made at the end of each
payment interval or period.
2. Annuity due is an annuity where the series of payments are made at the beginning of each
payment interval or period.

3. Deferred annuity is an annuity in which the payment starts at the end of a specified period
or some future date.

C. Annuity according to length of payment

1. Simple Annuity is when the payment intervals coincide with interest compounding periods.
2. General annuity is when the payment intervals do not coincide with interest compounding
periods.

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Simple Annuity
Simple annuity is a series of payments at fixed intervals, guaranteed for a fixed number
of compounding periods. There are three classifications of simple annuity, namely ordinary
annuity, annuity due, and deferred annuity. All of these may come from an investment and is
paid regularly on a fixed period of time such as payments, for insurance, home mortgage or pension
from retirement policies.

Classification of Simple Annuity According to Dates of Payments

1. Ordinary annuity is a series of equal payments made at the end of each period over a
fixed amount of time. The payment comes at the end of the covered term. An example is a
payment for the installment loan on December 1 is actually paying for January 1, and when
an amount is paid on January 1, it is actually for the month of February.

Illustration 8.1
Let the time interval be the time between successive payments, and let the term be time
between the first and last payment interval, and periodic payment (R) be the amount in each
payment.

2. Annuity due is the payment that comes at the beginning of the term. When payment is due
on December 1, it means the payment is for the month of December, from the first day to the
last day of the month.

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Illustration 8.2 Figure below shows the cash flows of annuity due.

3. Deferred annuity is an annuity in which the payment starts at the end of a specified
period or some future date.

Illustration 8.3
The figure below shows the cash flows of deferred annuity.

Present and Future Values of Ordinary Annuity

Present value (Pv) is the current value of a set of equal periodic payments or cash flows
of all payment in the future, given a specified interest rate or discount rate.

Future value (Fv), sometimes called amount of annuity, measures the future sum of money.
It is the total of all periodic payments due at the end of the term.

Formulae for the Computation of Simple Annuity by Exponential or Geometric Progression

Method
1−(1+𝑖)−𝑛
1. Present value Pv = R[ ]
𝑖
(1+𝑖)𝑛 −1
2. Future value (final amount) F= R [ ]
𝑖
𝑃𝑣 𝐹
3. Periodic payment: R = 1−(1+𝑖)−𝑛 or R = (1+𝑖)𝑛 −1
[ ] [ ]
𝑖 𝑖

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 4. Total number of conversion period

(𝑃 )(𝑖) (𝑃 )(𝑖)
𝑙𝑛[1− 𝑣 ] 𝑙𝑜𝑔[1− 𝑣 ]
𝑅 𝑅
n=− or n = −
𝑙𝑛(1+𝑖) 𝑙𝑜𝑔{1+𝑖)}

where: R = regular or periodic payment

Pv = present value of annuity

Fv = future value of annuity(final amount)

r = rate of interest per annum

r
i = interest rate per conversion period =
m
m = conversion period

t = time in years

n = total number of conversion period = m•t

Illustrative Example 8-13

Find the present and future amount of an annuity with a regular payment of 5,000
PHP payable at the end of every 6 months for 3 years, if money is worth 10 % compounded
semi-annually.

Solution: The payment starts at the end of each period or 6 months, then the annuity is
ordinary.

𝑟 0.1
𝑅 = 5,000, r = 10%(0.1), t = 3, m=2, 𝑖 = = = 0.05, n = m•t = 2(3)= 6
𝑚 2

𝑃𝑣 =?, F = ?
1−(1+𝑖)−𝑛 1−(1+0.05)−6
Present value: 𝑃𝑣 = R[ ] = 5,000[ ]
𝑖 0.05

1−(1.05)−6 1−(0.7462)
𝑃𝑣 = 5,000[ ] = 5,000[ ]
0.05 0.05

Financial Management 246

 0.2538
𝑃𝑣 = 5,000[ ] = 5,000(5.076)
0.05

𝑷𝒗 = 25,380 PHP
1−(1+0.05)−6
By using the scientific calculator, find the value of [ ]
0.05

Future value (final amount):

(1+𝑖)𝑛 −1 (1+05)6 −1
F= R [ ]= F= 5,000 [ ]
𝑖 0.05

(1.05)6 −1 1.34−1
F= 5,000 [ ] = 5,000 [ ]
0.05 0.05
0.34
F= 5,000 [ ]= 5,000(6.8)
0.05

F = 34,000 PHP

To check answers using online software/calculator, go to:

Howard, Richard(2020), Buy upside:
https://www.buyupside.com/calculators/annuityordinarypresentvalue.htm

Enter the values in the space provided in the software for R(payment), n =6, and i= 5,
periodic interest rate is also the discount rate, then, click “calculate”

Financial Management 247

 Disregard the dollar sign and use the PHP for its monitary unit, and the negligible
differences in answers are due tothe rounding off numbers.
In checking the answer for future value (F) go to: Howard, Richard(2020), Buy upside;
https://www.buyupside.com/calculators/annuityordinarypresentvalue.htm

Illustrative Example 8-14

Find the present and future amount of an annuity of 10,000 PHP payable at the end of
the month for 5 years, if money is worth 8 % compounded quarterly.

Solution : The payment will begin at the end of the year , then it is an ordinary annuity.
𝑟 0.08
𝑅 = 10,000, r = 8%(0.08), t = 5, m=4, 𝑖 = = = 0.02,
𝑚 4
n= m•t = 4(5)= 20, 𝑃𝑣 =?, F = ?
1−(1+𝑖)−𝑛 1−(1+0.02)−20
Present value: 𝑃𝑣 = R [ ] = 10,000[ ]
𝑖 0.02
1−(1.02)−20 1−(0.673)
𝑃𝑣 = 10,000[ ] = 10,000[ ]
0.02 0.02
0.327
𝑃𝑣 = 10,000[ ] = 10,000(16.35)
0.02

𝑷𝒗 = 163,500 PHP

Financial Management 248

 Future value (final amount):
(1+𝑖)𝑛 −1 (1+0.02)20 −1
F= R [ ]= 10,000 [ ]
𝑖 0.02
(1+0.02)20 −1 (1.02)20 −1
F= 10,000 [ ] = 10,000 [ ]
0.02 0.02
1.4859−1 0.4859
F= 10,000 [ ]= 10,000 [ ]
0.02 0.02

F= 242,950 PHP

Illustrative Example 8-15

Determine the periodic payment of an ordinary annuity in order to accumulate a

sum of 750,000 PHP after 4 years, if the money is worth 6% is compounded quarterly.

𝑟 0.06
Solution: Fv= 750,000, m = 4, t = 4 years, 𝑖= = = 0.015,
𝑚 4
n= m•t = 4(4)= 16

𝐹 750,000
R= (1+𝑖)𝑛 −1 = (1+0.015)16 −1
[ ] [ ]
𝑖 0.015

750,000 750,000 750,000

R= (1.015)16 −1
= 0.269 =
[ 0.015 ] [ ] 17.933
0.015

R = 41,822.34 PHP

To check answers using online software/calculator, go to:

Howard, Richard(2020), Buy upside;
https://www.buyupside.com/calculators/annuityordinarypaymentfuturevalue.htm
Enter the values in the space provided in the software for F, n, and i= periodic interest rate is
also the discount rate, then, click “calculate”

Financial Management 249

Illustrative Example 8-16
In how many years will it take to pay a present loan balance of 120,000 PHP, with an
equal periodic payments of 8,000 PHP, payable at 12% compounded monthly?

𝑟 0.12
𝑅 = 8,000, r = 12%(0.12), m=12, 𝑖 = = = 0.01, 𝑃𝑣 = 120,000, n=mt, n=? , t = ?
𝑚 12

Solution:
(𝑃 )(𝑖) (120,000)(0.01)
𝑙𝑛[1− 𝑣 ] 𝑙𝑛[1− 8000
]
𝑅
𝑛=−
𝑙𝑛{1+𝑖)}
=−
𝑙𝑛{1.01)}
(120,000)(0.01)
𝑙𝑛[1− ] 𝑙𝑛[1−0.15]
8000
𝑛= − = −
𝑙𝑛{1.01)} 𝑙𝑛{1.01)}

ln (0.85) −0.1625
𝑛= − = −
ln (1.01) 0.00995
𝑛 16
𝑛 = 16.33, from n = mt , t = =
𝑚 12

t= 1.33 yrs or approx. 1 year and 4 months

Financial Management 250

 Exercise 8-4

Solve for the unknown variable in simple ordinary annuity.

1. At present, a man is now 45 years of age. As part of his retirement plan he will invest
20,000 PHP a year, a regular payment worth 5% compounded quarterly. How much
money will he earn upon reaching the age of 65?

2. Determine the periodic payment if the present value of annuity (Pv ) is 250,000 PHP,
with annual rate of r = 12 % compounded semi-annually in 6 years.

3. Assuming the periodic payment for a certain simple annuity (R) is 15,000 PHP, r = 10%
compounded monthly in 3 years, a. What is the present value of the annuity? b. What is
the future value of the annuity?

4. Find the periodic payment of annuity for a future value of 1,200,000 PHP and
worth 8% compounded bi-monthly in 4 years.

Lesson 8.5. Stocks and Bonds

In investment both stocks and bonds make profit. A stock represents share of ownership
of an issuing company or corporation, including a claim on the company’s earnings and assets
based from the written policies or contract. The buyer of the stock is known as stockholder, in
which the earnings depend on the source’s net profit. A bond is debt contract issued by the
company to raise money, and the bondholder will pay with interest made at regular interval
during time periods until maturity. In this lesson, you will learn the computation of values related
to stocks and bonds.

Financial Management 251

Definitions 8-2

Stocks, or shares of stock, represent an ownership in the issuing company or corporation. The
stock holder has a partial ownership in a company’ assets, earning, voting rights and potential
profit that depends on the company’s success.
Bonds are written contracts of long-term debt granting the investor’s legal claim on future cash
flows of the borrower that indicates the promised principal amount and interest to be paid at
a specific date.
Present value of a bond is the value obtained by discounting the bond's expected or future
cash payments by the current market interest rate.

Face value also known as the par value refers to how much a bond will be worth on its maturity
date.
Maturity date is the termination or date on which a borrowed amount must be
repaid to the investor in full.
Redemption value is the price or amount at which a debt is redeemed before its maturity date.

Zero-coupon bond is a bond with no regular interest coupon but only a final maturity value.

Discount bond is a bond selling at lower than its maturity value.

Premium bond is a bond selling at more than its maturity value.

Perpetual bond is a bond with no maturity date and no final maturity value but only a
regular interest coupon.

Price of the bond is the sum of the present values of all coupon payments plus the
present value of the par value at maturity.

Financial Management 252

Formulae for Present Value of Bond
Let Pv = present value of the bond, Fv = face value of the bond, 𝑃𝑏 = price of the bond
𝑟
r = rate of discount. 𝑖 = , and n = maturity date or the date the bond was redeemed.
𝑚

𝐹𝑣
𝑃𝑣 =
(1+𝑖)𝑛

𝐹𝑣 = 𝑃𝑣 (1 + 𝑖)𝑛

𝐹
𝑙𝑛( 𝑣 )
𝑃𝑣
n=
ln (1+𝑖)

𝐹
ln( 𝑣 )
−1 𝑃𝑣
𝑖 = ln [ ]−1
𝑛

Formulae for Present Value of Bond

𝐹 1−(1+𝑖)−𝑛
𝑃𝐵 = 𝑛
+ C(F)[ ]
(1+𝑖) 𝑖

where: PB = price of the bond

F = face value of the bond
r
i= investment rate or redemption rate per period, i = m

r = market rate(to yield or discount), redemption rate

m = conversion periods
n = number of period from purchased to redemption date
C = coupon rate or bond rate per period

Financial Management 253

 Illustrative Example 8-17

A Zero-coupon bond has a face value of 200,000 PHP which will mature in 5 years.
The issuer redeemed the bond before the maturity date at discount rate of 8%. What is the
current value of the bond?
Solution:
Fv = 200,000, r = 0.08(8%), n = 5 years
𝐹𝑣 200,000 200,000 200,000
𝑃𝑣 = = 5 = =
(1+𝑖)𝑛 (1+0.08) (1.08)5 1.4693

𝑷𝒗 = 𝟏𝟑𝟔, 𝟏𝟏𝟗. 𝟐𝟒 PHP

To check answer go to compound interest calculator:

Furey, Edward (2023) ,Compound Interest Calculator,
https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php

Select calculate “P” using A, then, enter A =200,000 , R=8, n=1(annually), and t=5, then
click “calculate”

Financial Management 254

Illustrative Example 8-18

Referring to Example No. 1, Find the present value of the bond if redeemed 3 years
before the maturity date and the interest is reduced to 5%.
Solution:
Fv = 200,000, r = 5% = 0.05, n = (5 –3) years = 2 years

𝐹𝑣 200,000 200,000 200,000

𝑃𝑣 = = = =
(1+𝑖)𝑛 (1+0.05)3 (1.05)3 1.1576

𝑷𝒗 = 𝟏𝟕𝟐, 𝟕𝟕𝟏. 𝟐𝟓 PHP

Illustrative Example 8-19

A Zero-coupon bond has a face value of 350,000 PHP with 4 years maturity. If the
bond is redeemed with an amount of 280,000 PHP . What is the discount rate?
Solution: Fv = 350,000, Pv = 280,000 , n= 4 , 𝑖 =? , 𝑟 = ?

𝐹 350,000
ln( 𝑣 ) ln( ) ln(1.25)
−1 𝑃𝑣 −1
𝑖 = ln [ 𝑛
] − 1 = ln [ 280,000
4
] − 1= ln−1 [ 4
]−1

𝑖 = ln−1 (0.0558) − 1
𝑖 = 1.0574 − 1 = 0.574x 100% = 5.74% ,

Illustrative Example 8-20

Diamond Company issued a bond having a face value of 900,000 PHP carrying a
coupon rate of 12% to be paid quarterly and maturing in 6 years. The market interest rate is
8%. What is the purchase price of the bond?
𝑟 12
Solution: 𝐹𝑣 = 900,000, m = 4, t= 6, n= mt = 4(6) = 24, C = = = 3(0.03)
𝑚 4
8
𝑖= = 2(0.02)
4
𝐹 1−(1+𝑖)−𝑛
𝑃𝐵 = 𝑛
+ C(F)[ ]
(1+𝑖) 𝑖

Financial Management 255

 900,000 1−(1+02)−24
𝑃𝐵 = 24
+ (0.03)(900,000) [ ]
(1+0.02) 0.02

900,000 1−(1.02)−24
𝑃𝐵 = 24
+ (0.03)(900,000) [ ]
(1.02) 0.02

900,000 1−0.6217
𝑃𝐵 = +[ ]
1.6084 0.02

900,000 1−0.6217
𝑃𝐵 = +27,000[ ]
1.6084 0.02

0.3783
𝑃𝐵 = 559,562 +27,000[ ]
0.02

𝑃𝐵 = 559,562 +510,705

𝑷𝑩 = 1,070,267 PHP
The bond is sold at premium rate, because c > r, and PB > F.
To check the answer go to:
Howard, Richard(2020), Buy upside,
https://www.buyupside.com/calculators/bondpresentvalue.htm
Enter the given values to the space provided by the software, then, click “calculate” and look
for the answer in other table

Financial Management 256

 Look for the answer in other table as shown below:

Illustrative Example 8-21

A 300,000 PHP at 10 % bond with bi-monthly coupons will be redeemed at par at the
end of 3 years. What is the purchase price of the bond to yield 12%?

Solution: 𝐹𝑣 = 300,000, m = 6, t= 4, n= mt = 4(3) = 12,

𝑟 10 12
C= = = 1.67(0.0167), 𝑖 = = 2(0.02)
𝑚 6 6
𝐹 1−(1+𝑖)−𝑛
𝑃𝐵 = 𝑛
+ C(F)[ ]
(1+𝑖) 𝑖

−12
300,000 1−(1+0.02)
𝑃𝐵 = 12
+ (0.0167)(300,000) [ 0.02
]
(1+0.02)

300,000 1−(1.02)−12
𝑃𝐵 = 12
+ (0.0167)(300,000)[ ]
(1.02) 0.02

300,000 0.2115
𝑃𝐵 = + (0.0167)(300,000) [ ]
1.268 0.02

𝑃𝐵 = 236,593 + 5,010[10.575] = = 𝟐𝟖𝟗, 𝟓𝟕𝟑. 𝟕𝟓

𝑷𝑩 = 𝟐𝟖𝟗, 𝟓𝟕𝟑. 𝟕𝟓 PHP. The bond is sold at discount rate, because c < r, and PB < F
Financial Management 257
Lesson 8.6 Mutual Funds

Mutual Fund is a fund managed by a trust company or firm that collects money from
investors to purchase stocks or bonds. Each investor will earn profit based from Net Assets
Value (NAV). All investments in the mutual fund is called funds portfolio, and the net value
assets is computed at the termination of each trading on the closing market price of the portfolio
securities.

𝐴−𝐿
The Net Asset Value(𝑁𝐴𝑉) is calculated by the formula 𝑁𝐴𝑉 = , Where :
𝑛

A= Amount of assets, L= amount of liabilities and n = number of share outstanding.

Illustrative Example 8-22

A mutual fund has 130M PHP worth of total investments and the total liabilities costs 60M
PHP. What is the net asset value if there were 1,100 share outstanding?

Solution: A = 130M, L= 60M, n = 1,100, NAV= ?

𝐴−𝐿 130−60
𝑁𝐴𝑉 = = = 0.063636M or 63,636 Php
𝑛 1,100

Illustrative Example 8-23

An certain investment trust firm has 50M PHP worth of stocks and 20M PHP worth
of bonds, the total liabilities worth 7.2M. PHP. What is net asset value for each 1,500 share
outstanding?

Solution: A = 50M +20M = 70M, L= 7.2M, n = 1,500, NAV= ?

𝐴−𝐿 70−7.2
NAV = = = 0.041867m or 41,867 PHP
𝑛 1,500

Financial Management 258

Exercise 8-5

1. A Zero-coupon bond has a face value of 180,000 PHP which will mature in 6 years. The
issuer redeemed the bond before the maturity date at discount rate of 9%. What is the
current value of the bond?

2. A bond has a face value of 225,000 PHP with 6 years maturity. If the bond is redeemed
with an amount of 175,000 PHP what is the discount rate?

3. A bond having a face value of 750,000 PHP, carrying a coupon rate of 11 % to be paid
semi-annually and maturing in 7 years. The market interest rate is 9 %. What is the
purchase price of the bond?

4. The face value of the bond is 450,000 PHP at 6 % quarterly compounding coupons and
will be redeemed at par at the end of 4 years. What is the purchase price of the bond to
yield 10%?

5. A mutual fund has 120M PHP worth of stocks and 35M PHP worth of bonds, and an
additional 15.8M PHP in funds’ portfolio the total liabilities worth 38.9M PHP . What is
net asset value for each 2,300 share outstanding?

Financial Management 259