MMW Finance

• What is interest in the context of finance?


  Amount paid for borrowing or using someone else's money
• How is interest calculated?


  As a percentage of the money borrowed
• What is simple interest?


  Interest paid only on the original principal
• What is the formula for calculating simple interest?


  $I =$$P \cdot r \cdot t$
• What does each variable in the simple interest formula represent?

  P is principal, r is interest rate, t is time
• What is ordinary interest?


  Interest computed assuming a year has 360 days
• How is ordinary interest calculated?


  $I =$$\frac{P \cdot r \cdot \text{no. of days}}{360}$
• What is exact interest?


  Interest computed assuming a year has 365 days
• How is exact interest calculated?


  $I =$$\frac{P \cdot r \cdot \text{no. of days}}{365}$
• What is future value in finance?


  Value of an asset at a specified date in the future
• What is the formula for future value?


  $FV =$$\text{Orig. Investment} \times (1 + \text{investment rate})^{\text{number of years}}$
• What should you do when time is expressed in months for future value calculation?


  Multiply the investment rate by the number of months divided by 12
• If you invest P50,000 for 3 years at 15% simple annual interest, what is the future value?


  $FV =$$50000 \times (1 + 0.15 \times 3) =$$50000 \times 1.45 =$$72500$
• What is compound interest?


  Interest calculated on the principal and accumulated interest
• What is the formula for compound interest?


  $A =$$P \left(1 + \frac{r}{n}\right)^{nt}$
• What do the variables in the compound interest formula represent?

  P is principal, r is annual interest rate, t is time, n is compounding frequency
• If you invest P100,000 at 7% compounded semi-annually for 5 years, how much interest will you earn?


  $A =$$100000 \left(1 + \frac{0.07}{2}\right)^{2 \cdot 5} =$$100000 \left(1 + 0.035\right)^{10} \approx 100000 \times 1.4107 \approx 141070$
• What is an annuity?


  Regular equal deposits or payments made at equal intervals
• What is an ordinary annuity?


  Annuity paid at the end of each term
• What is an annuity due?


  Annuity paid at the beginning of each term
• What is the formula for the present value of an ordinary annuity?


  $A =$$R \left(\frac{1 - (1 + r)^{-n}}{r}\right)$
• What does each variable in the present value of an ordinary annuity formula represent?


  A is present value, R is periodic payment, r is rate per period, n is number of periods
• If Mr. X wants to receive P10,000 monthly for 5 years at 10% interest, what is the present value of the annuity?

  $A =$$10000 \left(\frac{1 - (1 + 0.10/12)^{-60}}{0.10/12}\right)$
• What is the formula for the future value of an ordinary annuity?


  $F =$$R \left(\frac{(1 + r)^{n} - 1}{r}\right)$
• What does each variable in the future value of an ordinary annuity formula represent?


  F is future value, R is periodic payment, r is interest rate per period, n is number of periods
• If Ms. Y deposits P2000 quarterly for 3 years at 3.5% interest, what is her total savings?


  $F =$$2000 \left(\frac{(1 + 0.035/4)^{12} - 1}{0.035/4}\right)$
• What is the formula for the present value of an annuity due?


  $A =$$R \left(\frac{1 - (1 + r)^{-n}}{r}\right) \cdot (1 + r)$
• What does each variable in the present value of an annuity due formula represent?


  A is present value, R is periodic payment, r is rate per period, n is number of periods
• If you pay P50,000 monthly for 2 years at 5% interest, what is the total payment?


  $A =$$50000 \left(\frac{1 - (1 + 0.05/12)^{-24}}{0.05/12}\right) \cdot (1 + 0.05/12)$
• What is the formula for the future value of an annuity due?


  $F =$$R \left(\frac{(1 + r)^{n} - 1}{r}\right) \cdot (1 + r)$
• What does each variable in the future value of an annuity due formula represent?


  F is future value, R is periodic payment, r is interest rate per period, n is number of periods
• If a father wants to save P250,000 for his child's education in 4 years at 7% interest, how much should he deposit quarterly?


  $A =$$250000 \left(\frac{0.07/4}{(1 + 0.07/4)^{16} - 1}\right)$
• If Andy borrows P20,000 at 4% compounded quarterly and pays P1,000 every 3 months, how long must he pay?


  Calculate using the formula for the present value of an annuity
• How do you find the number of semi-annual payments needed to accumulate P15,000 at 5% interest?


  Use the formula for the future value of an ordinary annuity
• What is a deferred annuity?


  An annuity where the first payment is made at a later date
• What is a deferment period?


  Length of time from now to the first payment
• What is the formula for the present value of a deferred annuity?


  $A =$$R \left(\frac{1 - (1 + r)^{-n}}{r}\right) \cdot (1 + r)^{-k}$
• If you calculate the present value of a deferred annuity of P5000 every 3 months for 4 years starting in 2 years at 4% interest, what formula do you use?


  Use the formula for the present value of a deferred annuity
• What is a consumer loan?


  A loan given to consumers for specific expenditures
• What are the two types of consumer loans?

  Secured and unsecured loans