SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 3 – Module 9:
Basic Long-term Financial Concepts
Business Finance – Grade 12
Alternative Delivery Mode
Quarter 3 – Module 9: Basic Long-term Financial Concepts
First Edition, 2021

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 SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 3 – Module 9:
Basic Long-term Financial Concepts
Introductory Message
For the facilitator:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Basic Long-
term Financial Concepts!

This module was collaboratively designed, developed and reviewed by educators both from
public institutions to assist you, the teacher or facilitator in helping the learners meet the
standards set by the K to 12 Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and independent learning
activities at their own pace and time. Furthermore, this also aims to help learners acquire the
needed 21st century skills while taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of the module:

Notes to the Teacher

This contains helpful tips or strategies that will
help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this module. You also
need to keep track of the learners' progress while allowing them to manage their own learning.
Furthermore, you are expected to encourage and assist the learners as they do the tasks
included in the module.
For the learner:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Basic Long-
term Financial Concepts!

This module was designed to provide you with fun and meaningful opportunities for guided
and independent learning at your own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

This will give you an idea of the skills or

What I Need to Know
competencies you are expected to learn in the
module.
This part includes an activity that aims to check
What I Know what you already know about the lesson to take. If
you get all the answers correct (100%), you may
decide to skip this module.
This is a brief drill or review to help you link the
What’s In
current lesson with the previous one.

In this portion, the new lesson will be introduced to

What’s New
you in various ways; a story, a song, a poem, a
problem opener, an activity or a situation.
This section provides a brief discussion of the
What Is It
lesson. This aims to help you discover and
understand new concepts and skills.
This comprises activities for independent practice
What’s More to solidify your understanding and skills of the
topic. You may check the answers to the exercises
using the Answer Key at the end of the module.
This includes questions or blank
What I Have Learned
sentence/paragraph to be filled in to process what
you learned from the lesson.
This section provides an activity which will help
What Can I Do
you transfer your new knowledge or skill into real
life situations or concerns.
This is a task which aims to evaluate your level of
Assessment
mastery in achieving the learning competency.

In this portion, another activity will be given to you

Additional Activities
to enrich your knowledge or skill of the lesson
learned.

Answer Key This contains answers to all activities in the

module.
At the end of this module you will also find:

References This is a list of all sources used in developing this

module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in performing the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities included
in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not hesitate to
consult your teacher or facilitator. Always bear in mind that you are not alone.
We hope that through this material, you will experience meaningful learning and gain deep
understanding of the relevant competencies. You can do it!
 What I Need to Know

This module was designed and written with you in mind. It is here to help you in computing
loan amortization using mathematical concepts and the present value tables. The scope of
this module permits it to be used in many different learning situations. The language used
recognizes the diverse vocabulary level of students. The lessons are arranged to follow the
standard sequence of the course. But the order in which you read them can be changed to
correspond with the textbook you are now using.

The module has only two lessons, namely:

• Lesson 1 – computing loan amortization using mathematical concepts and the present
value tables

After going through this module, you are expected to:

1. compute loan amortization using mathematical concepts and the present value tables.
(ABM_BF12-IIIg-h-20)
 What I Know

The following multiple-choice items are for you to answer. Choose the letter of the
correct answer and write your answers in your answer sheet.

1. The value of money to be received in the future is ____ the value of the same amount
of money in hand today?
a. higher than.
b. lower than.
c. the same as.
d. none of the above.

2. The Time value of money must be considered in total outlay decision because ____.
a. Cash inflows and out flows occur at different points.
b. Inflation greatly reduce the outflows.
c. A peso received in the future in more valuable than a peso today.
d. Cash flows are not known with certainty.
3. Why must money have time value?
a. Individuals prefer future consumption to present consumption.
b. Money today is worth more than money tomorrow in terms of purchasing power.
c. There is a possibility of earning risk free return on money invested today.
d. B and C above.
4. For which compensation does the real rate of interest reflect?
a. Present Value
b. Future Value
c. Time Value of Money
d. None of the above

5. Which are the 3 types of interest?

a. Fixed rate, current rate, market rate
b. Market rate, combination rate, fixed rate
c. Fixed rate, floating rate, current rate
d. Fixed rate, floating rate, combination rate

6. What does the concept of compound interest refer to?

a. The process of gradually retiring a debt through periodic payments of principal and
interest
b. The process of servicing a debt with regular interest payments, followed lump sum
payment of principal and interest at the end of the loan term.
c. The process of converting future lump sums and annuities into present values at a
stated interest rate.
d. The process of earning interest on an original amount, plus interest on interest
previously earned.

7. If compounding more time outcome will be greater value is a choice of the ____.
a. borrower
b. lender
c. liabilities holder
d. None
 8. What is often referred to as the interest rate used in the present value calculation?
I. Discount Rate
II. Inflation Rate
III. None of the given option

a. I only
b. II only
c. III only
d. I and II

9. In 2 years, you are to receive Php 10,000. If the interest rate were to suddenly
decrease, the present value of that future amount to you would ____.
a. remains unchanged
b. rise
c. fall
d. The correct answer cannot be determined

10. A money lent at an interest rate for a certain period of time?

a. Bond
b. Deposit
c. Loan
d. Investment

Lesson Computing Loan Amortization

Using Mathematical Concepts
1 and The Present Value Tables

This module will help you will learn how to compute loan amortization. It aims to understand
and apply procedure in computing loan amortization using mathematical concepts and the
present value tables. So, ready your working space and counters to make this lesson more
meaningful.

What’s In

At the beginning of your freshman year, your father deposited

Php 100,000 into a four-year time deposit certificate that pays
5% annual interest. You will receive the money including the
accumulated interest in the account, if you graduate with honors
in four years. How much will be in the account after four years?
Set up a time line to illustrate your calculation.
 What’s New

What are the contents of a loan agreement?

What Is It
?

To start with, read the scenario below:

ICTSI to raise $450-M via bonds

Reuters
Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI)
said on Wednesday it is raising $450 million through a bond issue. In a disclosure to the
local stock exchange, ICTSI said its board of directors approved on Tuesday night the
offering of new senior perpetual capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by
ICTSI. Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard
Chartered Bank were the joint lead managers and bookrunners. ICTSI, owned by the
Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port
development projects in 20 countries.
What is a bond/loan?
A loan is money lent at an interest rate for a certain period of time. Loans are normally secured
from different financial institutions, the most common of which, are banks.
A bond is also a form of loan, but can be traded through Philippine Dealing and Exchange
(PDEX) System
The relationship of time value of money in loan/bond pricing in Present Value (PV):
In getting the present value of a bond maturing a year from now, let us illustrate what we have
learned in the previous module regarding present value. The discussion follows the viewpoint
of the lender. Pricing for the loan/bond, will, nevertheless, be the same. Let’s say that you are
willing to invest a sum of money that will yield PHP100,000 at the end of year 1, what amount
should you invest today? If the investment earns 10%, then the amount to be invested or the
present value should be equal to PHP100,000 x (1/ (1.101)) = PHP90,909.09

I=10%, n= 1 year FV= 100,000

PV= 90,909.09

If this amount will be received in 2 years, then the present value is equal to P100,000 x (1/
(1.10)2) = P82,644.63. We may also use the present value table.
Present Value of interest payments (annuities):
In addition to receiving the face value at maturity, the investor/len+der also receives periodic
interest payments over the life of the bond. These periodic payments, as mentioned in the
previous module, are called annuities. To illustrate, assume that you will receive P10,000
annually for 3 years and the interest rate is 10%.

10,000 10,000 10,000

PV= Php 24,868.6

From the table (or by using the formula provided in the earlier module), we get that the present
value of annuity factor for 3 periods using 10% interest is 2.4869. Multiplying this factor by
PHP10,000 provides a present value of interest payments of PHP24,868.6.
Present Value of a Bond:
To calculate the present value or the price of a bond, we need to combine both the present
values of the face value and the annuity payments. In our previous example, suppose that a
bond with face value of PHP100,000 pays interest of 10% annually and matures in 3 years.
What is the price of the bond? First, we find the present value of the face value of the bond.
That is equal to PHP100,000 x (1/ (1.10)3) = PHP75,131.40. Next, we compute for the present
value of annuity payments of P10,000 annual interest (100,000 x .1). This was computed
earlier in our example, PHP24,868.6. Therefore, the price of the bond is:

PHP100,000 Face Value at 10% for 3 years 75,131.40

PHP10,000 interest for 3 years 24,868.60
Price of the Bond 100,000.00
Take note that interest payments may be made semi-annually, or even monthly. In this case,
we need to adjust the interest rates and time periods accordingly.
Bonds issued at a discount: When bonds are issued below the face or par value, they are said
to be issued at a discount. A discount occurs when the required rate of return is greater than
the nominal rate of return. For example, let’s say we have a PHP100,000 bond with a stated
rate of 10% and effective rate (required rate of return) of 12%, that pays interest semi-annually
and has a maturity of 3 years. At what price should the bond be issued? First, we need to
compute for the amount of interest payment per semi-annual period which is equal to 100,000
x 10% x 6/12 = 5,000. The total period is 6 (3 years x 2) and the discount rate to be used is
6% (12%/2). The price of the bond is as follows:

P100,000 Face Value at 6% for 6 periods 70,496.05

P5,000 interest for 6 periods 24,568.62
Price of the Bond 95,082.67

Bonds issued at a premium: When bonds are issued above par, they are said to be issued at
a premium. It occurs when the required rate (effective rate) is below the stated or nominal rate.
Let us recall our previous example but use 8% effective rate instead of 12%. It will result in
the following bond price:
PHP100,000 Face Value at 4% for 6 periods 79,031.45
PHP5,000 interest for 6 periods 26,210.68
Price of the Bond 105,242.13

The effective interest method distinguishes two types of interest rate, the nominal rate or the
stated rate and effective rate or the market rate. When the bond is sold at a discount, the
effective rate is higher than the nominal rate. On the other hand, when the bond is sold at a
premium, the effective rate is lower than the nominal rate. Using this method, the amortization
of bond discount or premium results in periodic interest expense equal to a constant
percentage of the carrying amount of the bonds. The following steps are required under the
effective interest method:
1. Calculate the bond interest expense by multiplying the carrying amount of the bonds
at the beginning of the interest period by the effective interest rate.
2. Calculate the bond interest paid (or accrued) by multiplying the face value of the
bonds by the contractual interest rate.
3. Calculate the amortization amount by determining the difference of (1) and (2).

Amortization of Bonds Issued at a Discount:

Let us use the previous example of a bond issued at a discount.
Period: 6 semi-annual periods (3 years)
Effective interest: 12%
Stated rate: 10%
Face Value: 100,000
Issue Price: 95,082.68
 Period Interest to be Interest Amortization Carrying
paid =100,000 Expense of Discount Balance
x 5% =carrying =Int exp. - Int
amount x 6% paid
95,082.68
1 5,000.00 5,704.96 704.96 95,787.64
2 5,000.00 5,747.26 747.26 96,534.90
3 5,000.00 5,792.09 792.09 97,326.99
4 5,000.00 5,839.62 839.62 98,166.61
5 5,000.00 5,890.00 890 99,056.61
6 5,000 5,943.40 943.40 100,000.00
• Amortization of bonds issued at a discount\

Bond Issued at a Premium:

Period: 6 semi-annual periods (3 years)
Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14
Period Interest to be Interest Amortization Carrying
paid =100,000 Expense of Premium Balance
x 5% =carrying =Int exp. - Int
amount x 4% paid
105,242.14
1 5,000.00 4,209.69 (790.31) 104,451.83
2 5,000.00 4,178.07 (821.93) 103,629.90
3 5,000.00 4,145.20 (854.80 102,775.09
4 5,000.00 4,111.00 (889.00) 101,886.10
5 5,000.00 4,075.44 (924.56) 100,961.54
6 5,000 4,038.46 (961.54) 100,000.00

Amortization of the discount or premium brings the carrying value/balance to equal the face
value of the bond upon maturity.
Bond issue costs (direct loan expenses) are either added to the carrying value of the bond/
loan in case of a premium or subtracted from the carrying value of the bond/loan in case of a
discount.
Straight-Line Amortization;
This method is not allowed in our country’s accounting standards but is allowed in other
countries. The straight-line method provides for an equal amortization of bond premium of
discount. The procedure is simply to divide the amount of the bond premium of bond discount
by the life of the bonds to arrive at the periodic amortization.
 What’s More

1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%.
How much is the issue price?
2. You have a one-year PHP1,000 bond with a coupon rate of 5% and was offered at an
effective rate of 6%. How much is the issue price?
3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was
offered at an effective rate of 5%. How much should he pay upfront? (Issue price)

What I Have Learned

A loan is money lent at an interest rate for a certain period of time. Loans are normally secured
from different financial institutions, the most common of which, are banks.
A bond is also a form of loan, but can be traded through Philippine Dealing and Exchange
(PDEX) System
Loan Amortization
An important application of compound interest involves loans that are paid off in
installments overtime. Included are car loans, housing loans, SSS/GSIS loans and many
business loans. These loans that require payment in equal amounts either on a monthly,
quarterly, or annual basis are called amortized loan.
Illustration of Amortization Process
A homeowner borrows Php 1,000,000 from the bank and the loan is to be repaid in
five equal payments at the end of the next 5 years. The bank charges 8% on the balance at
the beginning of each year.
PV= Php 1,000,000
I= 8%
N= 5 years
PMT= Php 250,456.45
Therefore, the homeowner must pay the bank, Php 250, 456.45 per year for the next
5 years. Each payment consists of two parts-interest and repayment of principal. This
breakdown is shown on an amortization schedule as follows;
 Year Beginning Payment Interest* Repayment Ending
Amount of Balance
Principal**
1 Php Php 250, Php 80,000 Php Php
1,000,000 456.45 170,456.45 829,543.55
2 829,543.55 250,456.45 66,363.48 184, 092.97 645,456.58
3 645,456.58 250,456.45 51,636.05 198,820.40 446,636.18
4 446,636.18 250,456.45 35,730.89 214,725.56 231,910.62
5 231,910.62 250,456.45 18,545.83 231,910.62 0

What Can I Do

Supposed you are going to prepare a 4-year amortization schedule of Mac Inc On January
1, 2015 for the bonds issued. 3,000,000 with a coupon rate of 8% maturing in 4 years. The
interest is paid annually, and the market interest rate at the date of issue was 11%. What is
the issue price of the bond? How can amortization schedule help you in dealing loan
balances?

Assessment

I. Multiple Choice. Choose the letter of the correct answer. Use a separate
answer sheet.

1. What does the concept of compound interest refer to?

a. The process of gradually retiring a debt through periodic payments of principal
and interest
b. The process of servicing a debt with regular interest payments, followed lump
sum payment of principal and interest at the end of the loan term.
c. The process of converting future lump sums and annuities into present values at
a stated interest rate.
d. The process of earning interest on an original amount, plus interest on interest
previously earned.

2. If compounding more time outcome will be greater value is a choice of the ____.
a. borrower
b. lender
c. liabilities holder
d. None
 3. What is often referred to as the interest rate used in the present value calculation?
I. Discount Rate
II. Inflation Rate
III. None of the given option

a. I only
b. II only
c. III only
d. I and II

4. In 2 years, you are to receive Php 10,000. If the interest rate were to suddenly
decrease, the present value of that future amount to you would ____.
a. remains unchanged
b. rise
c. fall
d. The correct answer cannot be determined

5. A money lent at an interest rate for a certain period of time?

a. Bond
b. Deposit
c. Loan
d. Investment

II. Solve.

On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The
bonds pay interest semi-annually. The market rate of interest as of the date of issuance
is 10%. What is the issue price of the bond? Prepare the 5-year amortization schedule
for the bond.

Additional Activities

Performance Task:

Visit a bank or any other financial institution and get a sample quotation for a certain type of
loans (Auto-loan, Housing Loan, Working Capital Loan, etc.) assigned. You may also utilize
amortization schedules of those who are in the business of selling apartments/condominiums.
discuss the specifics of the loan, and have them validate the accuracy of the amortization
schedules provided to you by showing your own solutions.
 References

Online Reference:

• http://www.abs-cbnnews.com/business/08/19/15/ictsi-raise-450-m-bonds. Retrieved
on July 27, 2020.

Book References:

• Teaching Guide for Senior High School BUSINESS FINANCE – Published by

Commission on Higher Education, 2016 ©, Chairperson: P.B. Licuanan, Ph. D.
• Business Finance for Senior High School, De Guzman, A.A., (2019), Lorimar
Publishing, Inc.

Answer Key

10. C
9. B
8. A
7. B
6. D
5. A
4. D
3. D
2. C
1. A

What I Know
What’s More
1. Since the coupon and effective rate are the same, the issue price stays at PHP2,000.
2. Issue price = (1,000 + 50 coupon)/1.06 = 990.56
3. Issue price = (1000 + 70 coupon/1.05=1,019.05
What’s New
• Amount of principal
• Maturity date and provision for repayment
• Term of the loan (lump sum, monthly, etc.)
• Grace period, if applicable
• Interest rates
• Loan/bond covenants (i.e. required ratios to be maintained)
• Penalties for default
• Collateral documents, if applicable
What’s In
1. Php 121,550.63
2.
Assessment
1. D
2. B
3. A
4. B
5. C
II.
Issue price: PHP4,308,869.40
Principal 2,455,653.01
Interest 1,853,216.39
Interest Amortization
Interest to be Expense of Premium Carrying
Period
paid =4M x 6% =carrying =Int exp. - Int Balance
amount x 5% paid
4,308,869.40
1 240,000.00 215,443.47 (24,556.53) 4,284,312.87
2 240,000.00 214,215.64 (25,784.36) 4,258,528.51
3 240,000.00 212,926.43 (27,073.57) 4,231,454.94
4 240,000.00 211,572.75 (28,427.25) 4,203,027.68
5 240,000.00 210, 151.38 (29,848.62) 4,173,179.07
6 240,000.00 208,658.95 (31,341.05) 4,141,838.02
7 240,000.00 207,091.90 (32,908.10) 4,108,929.92
8 240,000.00 205,446.50 (34,553.50) 4,074,376.42
9 240,000.00 203,718.82 (36,281.18) 4,038,095.24
10 240,000.00 201,904.76 (38,095.24) 4,000,000.00
What Can I Do
Issue price: PHP2,720,779.89
Principal 1,976,192.92
Interest 744,586.97
Interest Amortization
Interest to be Expense of Premium Carrying
Period
paid =3M x 8% =carrying =Int exp. - Int Balance
amount x 11% paid
2,720,779.89
1 240,000.00 299,285.79 59,285.79 2,780,065.68
2 240,000.00 305,807.22 65,807.22 2,845,872.90
3 240,000.00 313,046.02 73,046.02 2,918,918.92
4 240,000.00 321,081.08 81,081.08 3,000,000
Additional Activities
Answers may vary since
learners will have the
freedom to choose which
institution to choose.
For inquiries or feedback, please write or call:

Department of Education - Bureau of Learning Resources (DepEd-BLR)

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Email Address: blr.lrqad@deped.gov.ph * blr.lrpd@deped.gov.ph