Basic Long-Term

Financial Concepts

Prepared By:
Anna Carmela Rani S. Montalbo
MBA
Learning Objectives:

• Discuss the basic terms in financial concepts

• Solve for simple interest
• Solve for compound interest
• Discuss risk and its nature
• Enumerate the kinds of risks associated in business
• Discuss what is insurance
• Enumerate the type of insurance
Interest
•in finance and economics, it is the payment from a
borrower or deposit-taking financial institution to a lender or
depositor of an amount above repayment of the principal
sum (that is, the amount borrowed), at a particular rate.

Principal
• refers to the original sum of money borrowed in a loan or
put into an investment
Term of a Loan
•the lenght of time of number of time periods during which
the borrower can use the principal

Rate of Interest
•the percentage on the principal that the borrower pays the
lender per time period as compensation for forgoing other
investment or consumption opportunities
What is Simple Interest?

• Simple interest is a quick and easy method of calculating

the interest charge on a loan.
• Simple interest is determined by multiplying the daily
interest rate by the principal by the number of days that
elapse between payments.
How to Compute for Simple Interest?

Simple Interest=P x I x N
where:

P=principle
I=daily interest rate
N=number of days between payments
​
Understanding Simple Interest

• (refer to attached video file)

What is Compound Interest?
• Compound interest (or compounding interest) is interest
calculated on the initial principal, which also includes all of
the accumulated interest of previous periods of a deposit
or loan.
• Compound interest is calculated by multiplying the initial
principal amount by one plus the annual interest rate
raised to the number of compound periods minus one.
How to Compute for Compute Interest?
The formula for calculating compound interest is:

Compound Interest = Total amount of Principal and Interest in future (or Future
Value) less Principal amount at present (or Present Value)

= [P (1 + i)n] – P

= P [(1 + i)n – 1]

(Where P = Principal, i = nominal annual interest rate in percentage terms, and n

= number of compounding periods.)
Understanding Compound Interest

• (refer to attached video file)

What is Risk?

• Risk is defined in financial terms as the chance that an

outcome or investment's actual gains will differ from an
expected outcome or return.

• Risk includes the possibility of losing some or all of an

original investment.
Types of Financial Risk

• Every saving and

investment action involves
different risks and returns.
• In general, financial theory
classifies investment risks
affecting asset values into
two categories: systematic
risk and unsystematic risk.
Kinds of Risk associated in Business:
Insurance

• Insurance is a means of protection from financial loss. It is

a form of risk management, primarily used to hedge
against the risk of a contingent or uncertain loss.
• The insured receives a contract, called the insurance
policy, which details the conditions and circumstances
under which the insurer will compensate the insured. The
amount of money charged by the insurer to the
policyholder for the coverage set forth in the insurance
policy is called the premium.
However, when it comes to life insurance, people remain
skeptical. The most important insurance that can protect
their family and their children is the one that is not taken
seriously.

Life insurance doesn't insure your life. It insures your

family's ability to continue on without being financially
devasted.
Understanding the Purpose of Insurance
Insurance is for protection should anything happen to you.

In the Philippines, people don't talk about insurance as much as they talk
about investments. While insurance is not a fun topic, it is a critical part of
your financial strategy.

Today, people have all kinds of protection. They insure their house, car,
phones, and appliances. They even buy travel insurance for their
vacations.
Types of Insurance Coverage

1. Property and Casualty Insurance

• provides protection against most risks to property, such
as fire, theft and some weather damage. This includes
specialized forms of insurance such as fire insurance,
casualty insurance, marine insurance, and fidelity and
surety insurance
2. Life Insurance
•Life insurance is a contract between an insurance policy
holder and an insurer or assurer, where the insurer
promises to pay a designated beneficiary a sum of money
in exchange for a premium, upon the death of an insured
person. Depending on the contract, other events such as
terminal illness or critical illness can also trigger payment.

•The policy holder typically pays a premium, either regularly

or as one lump sum. Other expenses, such as funeral
expenses, can also be included in the benefits.
The Cost of Life Insurance

• The Cost of Life Insurance is simple to understand. It is

no different from the many other things you buy daily. You
buy it by its unit cost.
Sample Scenario:

Let's say the COI per Php 1,000.00 coverage for a 25-year
old man is Php 3.00. If he wants to get Php 300,000
coverage, he needs to buy 300 units, which is Php 900.00
per year.

However, the COI goes up every year. As he gets older and

the risk increases, the price also increases.
Here's an illustration:
AGE COI /Php 1,000 Php 100k Policy

25 Php 3.00 Php 3.00 x 100 = Php 300 anually

26 Php 3.10 Php 3.10 x 100 = Php 310 anually

27 Php 3.20 Php 3.20 x 100 = Php 320 anually

28 Php 3.30 Php 3.30 x 100 = Php 330 anually

29 Php 3.40 Php 3.40 x 100 = Php 340 anually

30 Php 3.50 Php 3.50 x 100 = Php 350 anually

As he ages, the cost also increases per year.

The 3 Rules of Life Insurance

1. There is no free insurance.

2. The Cost of Insurance (COI) always increases with age.

3. All insurance are term insurance which can be bundled

with a certain cash value.
Understanding Life Insurance

• (refer to attached video file)