Interest
- the amount paid or earned for the use of money
Principal
– the amount of money borrowed or invested.
Origin date
– the date on which money is received by the
borrower.
Maturity Date
- date on which the money borrowed is to be
completely repaid
Time or term
- the amount of time in years the money is
borrowed or invested length of time
between the origin and maturity dates.
Two types of interest
1. Simple interest – remains constant
throughout the investment term
Formula:
I=Prt
2. Compound interest – the interest from
the previous year also earns interest
Formula:
Future Value
F=P
(
1+j
)
n
n=mt
j=r
m
Present Value
P=F
(
1+j
)
−n
n=mt
j=r
m
Conversion Period (m) – frequency of conversion per year
oannually = 1
osemi – annually = 2
oquarterly = 4
omonthly = 12
Sample Problem:
Angel invested a certain amount at 8% simple interest per
year. After 6 years, the interest she received amounted to
P48,000.
Given: I = P 48,000 r = 8% t = 6 years
P = ?
Formula:
P=I
rt
P=P48,000
(0.08)(6)
P=P100 ,000
Annuity
- referred to as a fixed sum of money paid to someone
at regular intervals, subject to a fixed compound
interest rate
Payment Interval
– the payment between consecutive payments
Periodic/regular Payments
- the amount of each payment of an annuity
Types of annuity
1. According to payment interval and interest period
a. Simple annuity - if the payment interval is
the same as interval period?
b. General Annuity - compounding period is
unequal or not the same as the
payment interval
2. According to time of the payment
a. Ordinary Annuity - payment is made at the end
of the payment interval
b. Annuity Due - payment is made at the
beginning of the payment interval
3. According to the duration
a. Annuity Certain - payments begin and end at
definite times
b. Annuity Uncertain - payable for an indefinite
duration
Sample Problem:
Simple Annuity
Aling Paring started to deposit P2,000 quarterly in a fund
that pays 5.5% compounded quarterly. How much will
be in the fund after 6 years?
Periodic Payment (R) = P 2000
rate (r) = 0.055 term (t) = 6
compounding period (m) = 4
j = r/m = 0.055/4 = 0.01375
n = mt = 4(6) = 24
Future Value
F=P56,413.75
Stocks - the share in the company’s profit
- a form of equity financing or raising money by
allowing investors to be part owners of the company
Stock Dividend - part of the company’s profits that is
paid to owners
Bond - debt security that authorized guarantor
owes the holders
F=R
[
(1+j)n−1
]
j
F=P2000
[
(1+0.01375)24−1
]
0.01375
