PILAR COLLEGE OF ZAMBOANGA CITY, INC.

R.T. LIM BOULEVARD, ZAMBOANGA CITY

BASIC EDUCATION DEPARTMENT

PAASCU Accredited Level III
A.Y. 2020-2021

SENIOR HIGH SCHOOL

GRADE 12

LEARNING
MODULE in
BUSINESS FINANCE
Unit Topic: LONG-TERM FINANCIAL CONCEPTS

Lesson 5: BASIC LONG-TERM FINANCIAL CONCEPTS

NAME: ______________________________________________

SECTION: ___________________________________________

MRS. ROWENA L. ESTERO

TEACHER
Subject Area: Business Finance Quarter: FOURTH
Unit Topic: LONG-TERM FINANCIAL CONCEPTS Time Allotment: 180 minutes

Lesson 5: BASIC LONG-TERM FINANCIAL CONCEPTS

INTRODUCTION

Even as a student, you should be thinking about retirement. According to the experts, it’s never too soon to
start saving for retirement. Some experts believe that he recent increase in savings is temporary, because
they hypothesize that individuals are saving more only because they are unsure of what to do with their
money during the periods of economic uncertainty we have experienced in recent years.

In this lesson, the main focus for discussion are the concepts of the value of money, the present and future
value of money and the mathematical concepts and tools use in computing for finance and investment
problems.

OBJECTIVES

Students will be able to:

a. calculate future value and present value of money
b. compute for the effective annual interest rate
c. compute loan amortization using mathematical concepts and the present value tables
d. apply mathematical concepts and tools in computing for finance and investment problems
e. explain the risk-return trade-off

MOTIVATION
Time is GOLD!

Explain the meaning of the photo below. Why is time considered money?

__________________________________
__________________________________
__________________________________
__________________________________
__________________________________

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 DISCUSSION

THE BASIC FINANCIAL CONCEPTS

These Simple Financial Rules Are The Most Important Concepts in Building Wealth.

The basic financial concepts needed to thrive financially are highlighted throughout our
site. However, we've listed them here with links to the detailed pages. You must understand all
of these if you are to really understand your own personal finances and learn how to drastically
increase your chances of building long term wealth.

LIST OF BASIC FINANCIAL CONCEPTS

Financial Concept Definition / Description

By far the most important financial concept, describes how important the value of
The Time Value of
time is in building wealth. Money invested today is worth more than money
Money invested at any point in the future. That's because it has more time to grow and
compound. It is also the main reason that you'll want to get started with your
investing as early as possible.
Another important concept to keep your finances balanced. Don't keep all of your
Diversify your Risks money in just a few assets like your house or your company stock. Make sure that
and Investments you spread your investments over many different asset classes. Also, make sure
that if you hold a lot of mutual funds, that they do not overlap, or you may not be
diversified as you think.
Maybe the second most important basic financial concept to
The Compounding understand. Understanding this is key to being able to forecast future
Effect of Money growth. Your money may grow at the same rate each year in terms of percent, but
in terms of actual dollar growth, compounding means that your money will grow
faster and faster each year as a result of earning money not just on your investment,
but also on the returns from that investment.
A basic understanding of the stock market can be applied to your everyday finances
Understand the to help you manage your money better. Find out how understanding the stock
Stock Market market can help you weather its highs and lows. After all, people fear what they
don't understand and most beginners don't really understand the stock
market. Heck, even most advanced investors don't understand the stock market.
This basic financial concept is needed to really understand the breakdown of your
Keep a Household personal finances and to learn how to optimize them. If there is one tool you use to
Budget keep your spending in check and help you save money each month and year, it
should be a well crafted budget worksheet.
Understand that wherever you spend your time and money is a cost that you cannot
spend elsewhere. The money spent on a car could be invested in the stock
Opportunity Costs. market. The car will decline in value while the investments will thrive. Make each
decision while paying attention to other ways that you could spend or invest that
money. Choose the opportunity that maximizes your long term wealth.
You must understand how interest rates and overall rate of returns affect almost
everything in your financial life. For example, investing your money at 7% versus
Interest Rates 5%, over 40 years, means that you will have twice as much money, that's right,
twice as much money, for retirement. This is also the precise reason that it is so
important to lower your investment fees. Buying low fee funds or ETFs and
foregoing a financial advisor can easily make the difference of retiring early or late.

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 DISCUSSION

PRESENT VALUE AND FUTURE VALUE OF MONEY

The Difference between Compounding Interest and Simple Interest
SIMPLE INTEREST COMPOUND INTEREST
Definition
Interest is the cost of borrowing money, where the Compound interest accrues and is added to the
borrower pays a fee to the lender for the loan. accumulated interest of previous periods, so
Generally, simple interest paid or received over a borrowers must pay interest on interest as well
certain period is a fixed percentage of the principal as principal.
amount that was borrowed or lent
Formula
Simple Interest Compound Interest
=P×r×n =P×(1+r)t−P
where: where:
P=Principal amount P=Principal amount
r=Annual interest rate r=Annual interest rate
n=Term of loan, in years t=Number of years interest is applied

TIME VALUE OF MONEY (TVM) is the idea that money that is available at the present time is
worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance
holds that provided money can earn interest, any amount of money is worth more the sooner it is received. One of the
most fundamental concepts in finance is that money has a time value attached to it. In simpler terms, it would be safe
to say that a dollar was worth more yesterday than today and a dollar today is worth more than a dollar tomorrow.

This lesson is a practical approach to the time value of money. We fully understand that today's technology provides
multiple calculators and applications to help you derive both present value and future value of money. If you do not
take the time to comprehend how these calculations are derived, you may make critical financial decisions
using inaccurate data (because you may not be able to recognize whether the answers are correct or incorrect).

There are five (5) variables that you need to know:

1. Present value (PV) - This is your current starting amount. It is the money you have in your hand at the
present time, your initial investment for your future.
2. Future value (FV) - This is your ending amount at a point in time in the future. It should be worth more
than the present value, provided it is earning interest and growing over time.
3. The number of periods (N) - This is the timeline for your investment (or debts). It is usually measured
in years, but it could be any scale of time such as quarterly, monthly, or even daily.
4. Interest rate (I) - This is the growth rate of your money over the lifetime of the investment. It is stated
in a percentage value, such as 8% or .08.
5. Payment amount (PMT) - These are a series of equal, evenly-spaced cash flows.

You can calculate the fifth variable if you are

given any four of the five (all) variables listed
above. A simple example of this would be: If you
invest one peso (PV) for one year (N) at 6% (I),
you will receive P1.06 (FV). This would be the
same as saying the present value of P1.06 you
expect to receive in one year, is only $\P1.00
(PV).

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 DISCUSSION
CONCEPTS OF LOAN AMORTIZATION

What is Loan Amortization?

Loan amortization is the process of scheduling out a fixed-rate loan into equal payments. A portion of
each installment covers interest and the remaining portion goes toward the loan principal. The easiest way to
calculate payments on an amortized loan is to use a loan amortization calculator or table template. However,
you can calculate minimum payments by hand using just the loan amount, interest rate and loan term.

Lenders use amortization tables to calculate monthly payments and summarize loan repayment details for
borrowers. However, amortization tables also enable borrowers to determine how much debt they can afford,
evaluate how much they can save by making additional payments and calculate total annual interest for tax
purposes.

What Is an Amortized Loan?

An amortized loan is a form of financing that is paid off over a set period of time. Under this type of repayment structure,
the borrower makes the same payment throughout the loan term, with the first portion of the payment going toward
interest and the remaining amount paid against the outstanding loan principal. More of each payment goes toward
principal and less toward interest until the loan is paid off.
Loan amortization determines the minimum monthly payment, but an amortized loan does not preclude the borrower
from making additional payments. Any amount paid beyond the minimum monthly debt service typically goes toward
paying down the loan principal. This helps the borrower save on total interest over the life of the loan.

Types of Amortizing Loans

Amortizing loans include installment loans where the borrower pays a set amount each month and the payment goes to
both interest and the outstanding loan principal. Common types of amortizing loans include:
Auto loans Student loans
Home equity loans Personal loans
Fixed-rate mortgages
How Loan Amortization Works
Loan amortization breaks a loan balance into a schedule of equal repayments based on a specific loan amount, loan
term and interest rate. This loan amortization schedule lets borrowers see how much interest and principal they will pay
as part of each monthly payment—as well as the outstanding balance after each payment.

A loan amortization table can also help borrowers:

 Calculate how much total interest they can save by making additional payments
 Reverse engineer a loan payment to determine how much financing they can afford
 Calculate the total amount of interest paid in a year for tax purposes (this applies to mortgages, student
loans and other loans with tax-deductible interest)

How to Amortize Loans

The easiest way to amortize a loan is to use an online loan calculator or template spreadsheet like those available through
Microsoft Excel. However, if you prefer to amortize a loan by hand, you can follow the equation below. You’ll need
the total loan amount, the length of the loan amortization period (how long you have to pay off the loan), the payment
frequency (e.g., monthly or quarterly) and the interest rate.
where
To calculate the monthly payment on an amortized a: the total amount of the loan
loan, follow this equation: r: the monthly interest rate (annual rate / number
of payments per year)
a / {[(1 + r)n]-1} / [r (1+r)n] = p, n: the total number of payments (number of
payment per year x length of loan in years)\

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 DISCUSSION

Consider a P15,000 auto loan extended at a 6% interest rate and amortized over two years. The calculation
would be as follows:
P15,000 / {[(1+0.005)24]-1} / [0.005(1+0.005)24] = P664.81 per month
Then, calculate how much of each payment will go toward interest by multiplying the total loan amount by
the interest rate. If you will be making monthly payments, divide the result by 12—this will be the amount
you pay in interest each month. Determine how much of each payment will go toward the principal by
subtracting the interest amount from your total monthly payment.
To calculate the outstanding balance each month, subtract the amount of principal paid in that period from
the previous month’s outstanding balance. For subsequent months, use these same calculations but start with
the remaining principal balance from the previous month instead of the original loan amount.

To amortize the loan in the example above, first calculate how much you’ll pay in interest each month by
multiplying P15,000 by 6%—in this case P900—and then dividing by 12 monthly payments. In this case,
the borrower will pay P75 in interest during the first month [P15,000 x 0.06 / 12 = P75].

What Is an Amortization Table?

An amortization table lists all of the scheduled payments on a loan as determined by a loan amortization calculator.
The table calculates how much of each monthly payment goes to the principal and interest based on the total loan
amount, interest rate and loan term. You can build your own amortization table, but the simplest way to amortize a
loan is to start with a template that automates all of the relevant calculations.

Amortization tables typically include:

Loan details. Loan amortization calculations are based on the total loan amount, loan term and interest rate.
If you are using an amortization calculator or table, there will be a place to enter this information.
Payment frequency. Typically, the first column in the amortization table lists how frequently you’ll make
a payment, with monthly being the most common.

Total payment. This column includes the borrower’s total monthly payment. If you use an amortization
table template, this number will be calculated for you. You also can calculate it by hand or by using
a personal loan calculator.

Extra payment. If the borrower makes a payment beyond the minimum monthly amount, the amortization
calculator will apply the extra amount to the principal and calculate future interest payments based on the
updated balance.

Principal repayment. This part of the amortization table shows how much of each monthly payment goes
toward paying off the loan principal. This number increases over the life of the loan.

Interest costs. Likewise, the interest column of an amortization table tracks how much of each payment
goes toward loan interest. Monthly interest payments decrease over the life of an amortized loan.

Outstanding balance. This column shows the outstanding balance on the loan after each scheduled payment
and is calculated by subtracting the amount of principal paid in each period from the current loan balance.

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Basic Long-Term Financial Concepts Page 5 of 13
 DISCUSSION

Amortization Loan Table Example

The amortization table is built around a P15,000 auto loan with a 6% interest rate and amortized over a
period of two years. Based on this amortization schedule, the borrower would be responsible for paying
P664.81 each month, and the monthly interest payment would start at P75 in the first month and
decrease over the life of the loan. Absent any additional payments, the borrower will pay a total of
P955.42 in interest over the life of the loan.
Auto Loan Amortization Table

Month Beginning balance Interest Principal Ending balance

1 P15,000.00 P75.00 P589.81 P14,410.19

2 14,410.19 72.05 592.76 13,817.43

3 13,817.43 69.09 595.72 13,221.71

4 13,221.71 66.11 598.70 12,623.01

5 12,623.01 63.12 601.69 12,021.32

6 12,021.32 60.11 604.70 11,416.61

7 11,416.61 57.08 607.73 10,808.89

8 10,808.89 54.04 610.76 10,198.12

9 10,198.12 50.99 613.82 9,584.30

10 9,584.30 47.92 616.89 8,967.42

11 8,967.42 44.84 619.97 8,347.44

12 8,347.44 41.74 623.07 7,724.37

24 P 661.50 P3.31 P661.50 P 0.00

RISK-RETURN TRADE-OFF DEFINITION

While making investment decisions, one important aspect to consider is what one is getting in return for the
investment being made. Though this is one of the first things investors think of, another aspect, though
comparatively less discussed but equally as important, is the quantum of risk being taken while making the
investment.
The relationship between these two aspects of investment is known as the Risk-Return Tradeoff. The theory
deals with how much an investor is willing to risk in order to increase the chances of higher returns.
Risk’ is inherent in every investment, though its scale varies depending on the instrument. Return, on the
other hand, is the most sought after yet elusive phenomenon in the financial markets. In order to increase
the possibility of higher return, investors need to increase the risk taken. On the other hand, if they are
content with low return, the risk profile of their investment also needs to be low.

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 DISCUSSION

THE DYNAMICS OF RISK-RETURN TRADEOFF

The graph beside is a Risk-Return Trade off the graph. It shows the
relationship between these two variables while making an investment.

LOW RISK
The bottom-left corner of the graph shows that there is low return
for low-risk financial instruments. Government-issued bonds, for
instance, US Treasuries, are considered to be the lowest risk
financial instruments because they are backed up by the federal
government. But due to the relatively non-speculative nature of
the bonds, they have low returns than bonds issued by corporations. In fact, while assessing the expected
return of instruments, the return on government bonds is considered to be the risk-free rate.

HIGH RISK
As we move along the upward sloping line in the graph, the risk rises and so does the potential return. This
is understandable as investors parting with their money for riskier assets would demand better returns than
a risk-free security; else they have no reason to take that risk. This is the reason why the bonds issued by
governments and corporations for the same duration have different yields as with corporate bonds, there
is also a default risk priced into them which is not the case with federal bonds.

PORTFOLIO
So it may seem like government bonds should form a significant portion of an investment portfolio given
their near risk-free nature and the stability of returns. However, much higher returns provided by other
instruments like high yield bonds, and other asset classes like equities is what induces investors to assume
higher risk even though there is a possibility of capital loss there.

CALCULATING REQUIRED RATE OF RETURN

One question that stands out for an investor while deciding about investing in a security is its required rate
of return. For a given level of risk, what is the level of return that an investor would find attractive enough
to part with his money? The answer lies in calculating the risk premium.
The market risk premium is in addition to the risk-free rate of return. The relationship between these variables is as
follows: Required Return = Risk-free Return + Risk Premium
The higher the standard deviation (or any other tool for assessing risk) of an instrument, the higher the risk premium
is, which pushes up the required rate of return.

FIXED INCOME RETURNS

In the fixed income universe, the risk premium of government bonds is nearly zero, hence the required return is equal
to the risk-free rate of return. For investment-grade corporate bonds, there is some risk premium primarily due to
default risk, and thus, the required rate of return is higher than comparable government bonds. Meanwhile, for high
yield bonds, there is much higher risk premium as their credit ratings are of speculative grade, and thus, these bonds
offer the highest yields among the three.

EQUITIES RETURN
The same argument can be extended to equities vis-à-vis fixed income investments and within the equities universe
itself between blue-chip stocks, mid-cap stocks, small-cap stocks, and penny stocks and also between developed
market equities and emerging market stocks.

SECURITIES FROM LOWEST TO HIGHEST RISK-RETURN

Broadly speaking, the Risk-Return Tradeoff from the lowest to the highest for conventional asset classes and
instruments can be as follows. The following list is only indicative, not exhaustive:
 Government bonds * High-yield corporate bonds * Small-cap stocks and funds
 Municipal bonds * Blue-chip stocks and large-cap funds
 Investment-grade corporate bonds * Mid-cap stocks and funds * Futures & Options1–3
 Overseas equities (only for less developed stock markets compared to one’s home country)

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 PILAR COLLEGE OF ZAMBOANGA CITY, INC.
R.T. LIM BOULEVARD, ZAMBOANGA CITY

BASIC EDUCATION DEPARTMENT

PAASCU Accredited Level III
A.Y. 2020-2021

SENIOR HIGH SCHOOL

GRADE 12

RETURN THIS
MODULE in
BUSINESS FINANCE
Unit Topic: LONG-TERM FINANCIAL CONCEPTS

Lesson 5: BASIC LONG-TERM FINANCIAL CONCEPTS

Lesson’s knowledge Check (Activity 1)

Activities 2 to 5
Assessment Page

Performance Tasks (for week 6)

Name: Date Returned:

Section:

MRS. ROWENA L. ESTERO

TEACHER
 Kindly answer the lesson’s knowledge check (Activity 1), activities 2 to 5 and the assessment part with
all honesty and sincerity. You may write your answers in the indicated spaces of the activity.
.

KNOWLEDGE CHECK

ACTIVITY 1: SURVEY SAYS!

Read the following questions and write your answer on the space provided for.
1. What does loan amortization mean? Why is amortization of loan important to the operation of a
business?

2. How relevant is the study of the Loan amortization concept to me as a student of this institution?
How can the knowledge of such topic be considered advantageous to my person today and in the
future?

3. Integration No. 1: (ICV) What values am I expected to learn and develop in the process of studying
the Basic Long-Term Financial concepts? Why?

4. Integration No. 2 (Social Integration) How can I relate my knowledge of the loan amortization to
my own daily living and towards helping other members of my community?

5. Integration No. 3 (Lesson across Discipline - Economics) How does borrowing or loan affects the
economy of a society or country?

Short Essay Rubric:

Standard Excellent Very Good Good Fair
 Explains the topic with correct description and
provides related examples. 5 4 3 2
 Content shows connection of the concept and explains
sensible decision about the topic that can help achieve
the goal.

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 ACTIVITIES

ACTIVITY 2: COMPUTE FOR INTEREST

Directions: In the table are short problems on simple and compound interests.. Solve the problems
by using the formula presented on page 2 of the discussion on the blank spaces below
each number.

1. Suppose you plunk P5,000 into a one-year certificate of deposit (CD) that pays simple interest at
3% per annum. The interest you earn after one year would be _______?
What is asked/problem? What is the Formula? What is the Solution?

2. Continuing with the above example, suppose your certificate of deposit is cashable at any time,
with interest payable to you on a prorated basis. If you cash the CD after four months, how much
would you earn in interest? You would receive _____?
What is asked/problem? What is the Formula? What is the Solution?

3. Suppose Bob borrows P 500,000 for three years from his rich uncle, who agrees to charge Bob
simple interest at 5% annually. How much would Bob have to pay in interest charges every year,
and what would his total interest charges be after three years? (Assume the principal amount
remains the same throughout the three years, i.e., the full loan amount is repaid after three years.)
How much will Bob would have to pay in interest charges every year?
What is asked/problem? What is the Formula? What is the Solution?

4. Continuing with the above example, Bob needs to borrow an additional P 500,000 for three years.
Unfortunately, his rich uncle is tapped out. So, he takes a loan from the bank at an interest rate of
5% per year compounded annually, with the full loan amount and interest payable after three years.
What would be the total interest paid by Bob?
What is asked/problem What is the Formula? What is the Solution?

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 ACTIVITIES

ACTIVITY 3: TIME VALUE OF MONEY!

Directions: Solve the problem inside the box about the concept of time value of money. Show
the solution or computation to support your answer on the column opposite the problem.

Problem: ANSWER
Which would you choose? Why?
Suppose your boss gives you a cash bonus
for an outstanding performance at your job __________________________________________
this year. There are two options to choose __________________________________________
from:
__________________________________________
Option 1: Get the P15,000 bonus now. __________________________________________
Option 2: Get the P15,800 bonus a year __________________________________________
after. __________________________________________
Information you may consider in your __________________________________________
decision:
- Inflation rate is 5% per annum. Computation:
- Interest rate on bank deposits is 12% per
annum.

ACTIVITY 4: PEN UP !
Directions: Interview 2 family members or friends about their preference
about getting the money today or not. Ask them to give you 3
reasons for their decision.

Interviewee #1 ________________________

1. _______________________________________________________________________

2. ________________________________________________________________________

3. ________________________________________________________________________

Interviewee #2 ________________________

1. _______________________________________________________________________

2. ________________________________________________________________________

3. ________________________________________________________________________

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 ACTIVITIES

ACTIVITY 5: THINK ABOUT IT!

Directions: Answer the questions in two or three complete sentences. Write your answers inside
the box provided below.

1. Why do government borrow money from other countries? State at least 3 reason for borrowing money from
other countries.

2. Integration No. 4 (Faith/ Biblical Reflection: “Hebrews 13:5). How will you relate this bible verse with the
lesson discussed about borrowings: “Keep your life free from love of money, and be content with
what you have, for he has said, “I will never leave you nor forsake you.”

3. What is risk in business? What approaches can you use as intervention to manage risks in the future? Why?

Short Essay Rubric:

Standard Excellent Very Good Good Fair
Content shows connection of the concept and explains sensible 5 4 3 2
decision about the topic that can help achieve the goal.

SUMMARY

In this lesson, you learned to calculate future value and present value through solving problem on
real life situation; compute for the annual interest rate and loan amortization using mathematical
concepts and future value table. You also learned about the risk and return trade off concept.

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 ASSESSMENT
MULTIPLE CHOICE !

Directions: Indicate the correct answer to each question by writing the appropriate LETTER of your choice on
the space provided for in the last column of the table.
QUESTION OPTIONS ANSWER
1. All are variables of time value of A. Present Value C. Payment Amount
money, except… B. Discount Rate D. Interest Rate
2. Which is a form of financing that is A. Installment Payment C. Non-amortized Loan
paid off over a set period of time? B. Borrowing D. Amortized Loan
3. Which is NOT an example of an A. Car loans C. Student Loans
amortized loan? B. Personal Loans D. Lump-sum Housing Loan
4. Which of the following is NOT a A. Breaks a loan balance into scheduled repayments.
function of a loan amortization? B. Allows borrowers to see the monthly payments.
C. Allows borrowers to see the outstanding balance
after each payment.
D. Allows borrowers to see how much lump-sum
amount he should pay.
5. All are considered components of a A. Owner’s Personal Details C. Payment Frequency
loan amortization table, EXCEPT B. Loan Details D. Outstanding Balance

Answer activities with all honesty and sincerity. Check your

answers on the lesson’s knowledge check (Activity 1),
EXIT INSTRUCTIONS activities 2 to 5 and the assessment part to ensure that all
blanks have been answered. Make sure that you do not leave
any blank space unanswered. Please do not forget to write
your name and the date of submission of your answer sheets.
The entire module should be submitted back to the teacher
before getting the next module.

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2
 PERFORMANCE TASK WEEK 6
Following the example of an amortization table on page 6 of the lesson discussion, prepare your own
amortization table with these information:

Principal = P 25,000 Interest Rate = 5% Time = 2 years

The Loan Amortization table should have the following components:

Month Beginning balance Interest Principal Ending balance

Required: 1. Prepare a loan amortization table using the spaces inside the box below.
2. Show your computation or solutions on another sheet of paper.

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