The Nature of

Financial
Management
Learning Objectives
1. Calculate simple interest and compound interest;

2. Calculate finance charges

3. Determine the present value of an annuity due;

4. Determine the future value of an annuity due; and

5. Calculate interests from money markets and

sinking funds
Terms
• Interest
- The amount paid by the borrower.

• Principal/Present value
- The amount of money that is loaned.
Simple Interest
• The simple interest is given by
I = Prt

where P is the principal amount, r is the rate per year, and t is the number
or years.
If the number of days used is 360 days in a year, the interest is called
ordinary simple interest. If it uses 365 days in a year or 366 for a leap year
then the interest is called exact simple interest.
 Future value/Maturity value
• Total amount paid including the interest.

F=P+I
= P +Prt
= P(l + rt)
Examples
•   An employee borrows $60,000 for 7 months at an interest rate of
1.
12% per year. Find the:

a. Interest earned
I = Prt =(60,000)(.12)()
= $4,200.

b. Total amount he has to pay.

F = P(1 +rt) = 60,000
Example
2. To buy a computer, Raquel borrowed $3,000 at 9% interest for 4 years.
How much money did she have to pay back?
I = Prt =(3,000)(.09)(4)
=$1080

F = P(1 + rt) = ((3,000)(1 +(.09)(4))

= $4080
Examples
•3. The ordinary simple interest charged after 130 days of $10,200 is $575.
Find the interest rate.
Solution:
Use 360 days per year in computing for the ordinary simple interest.
Thus,
I = Prt
575 = 10,200r()
r = .156 or 15.6%
Compound interest
•  
Computed based on the principal amount and the total accumulated
interest earned. The total accumulated amount on the principal amount
on the principal P for an n periods at am interest rate of i per period is
given by:
F = P(1 + i)n
where n = mt and i = .
The interest rate j is called the nominal rate and m is the number if
compounding periods in a year.
Examples
•A  mother invested $100,000 in a mutual fund on the date her first son was
born. If the money is worth 10% compounded semi – annually, how much
will the son received in his 18th birthday.
The total number of periods, n = mt = (2)(18) = 36. the interest rate per
period is i = = = .05. Hence, the total amount the son should receive is
F = P(1 + i)n
= (100,000)(1+ 0.05)36
= $579,182.
Example
•  
What is the amount that should be deposited today at 6.5%
compounded quarterly in order to withdraw $200,000 and leave
nothing on the fund at the end of 5 years.
Solution
F = p()mt
p=
200,000 = p(1 + )4(5)
P = $144.883.46
Annuity: Sinking Fund and Amortization
• An annuity is a series of equal payments made at regular time intervals.
It is also known as sinking fund which is used for future financial
obligations such as educational expenses for children, replacement of
machines or equipment, and amortization of loans or assets.

• An ordinary annuity as one whose payments are made at the end of each
successive period, i is the interest rate per period, and n is the total
number of periods.
Formulas
Example
•   house and lot amounting to $3.5M is to be amortized by monthly
A
payments over 5 years at an annual interest rate 10%. What is the
monthly payment?

Solution
Here, P = 3,500,000, i = n = (12)(5)=60.
Using the formula ordinary annuity, then
Solution
Example
• An equipment costs $200,000 today and has a resale value of $50,000
after 10 years. The inflation rate is 5% per year. The annual interest rate
earned on investment is 6%. How much money needs to be set aside
each year in order to replace the said equipment with an identical model
10 years from now?
Thank you!