BUSINESS

FINANCE
CLASSROOM RULES

• For our class today, I will be expecting these rules

throughout the class session.
• Raise your hand when you have concerns, questions and
clarifications.
• Listen to others and participate in class discussions.
• Stay on task.
• Maintain orderliness.
• Listen and follow directions and instructions.
• Cooperate with during the discussion.
• Always do your best and enjoy.
REVIEW
It refers to how much of your total
assets has financed by debt and how
much has financed by equity.
REVIEW
• What do you call when there
exists a borrower-lender
relationship or bond?
REVIEW

This institution helps improve

the quality of life of its
members.
REVIEW

Enumerate the 5C’s.

REVIEW
Why does the credit department
evaluates on the basis of
Character, Capacity, collateral,
capital and conditions or 5C’s of
credit?
OBJECTIVES
a. distinguish simple and
compound interest;
b. solve exercises and problems in
computing for time value of
money with the aid of present
and future value;
c. describe the risk-return trade-
off.
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INTEREST
is the excess of resources (usually cash)
received or paid over the amount of
resources loaned or borrowed which is
called the principal.

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INTEREST

Simple Interest Compound Interest

Simple interest is the product of the Compound interest is the interest paid on
principal amount multiplied by the both the principal and the amount of
period’s interest rate (a one-year interest accumulated in prior periods.
rate in standard).

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SIMPLE INTEREST

𝐼 =𝑃𝑟𝑡
FUTURE VALUE
is what a sum of money invested today will become
over time, at a rate of interest

𝐹𝑉 =𝑃 +𝐼
Example 1: You invested P 10 000 for 3 years
at 10% and the proceeds from the investment
will be collected at the end of 3 years. Using a
simple interest assumption, the calculation will
be as follows:

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Example 1: You invested P 10 000 for 3 years
at 10% and the proceeds from the investment
will be collected at the end of 3 years. Using a
simple interest assumption, the calculation will
be as follows:

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Example 2: Five years ago, Joe invested
P 35 000 on simple interest at 5%. How much
is his money now?

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Example 2: Five years ago, Joe invested
P 35 000 on simple interest at 5%. How much
is his money now?

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Example 2: Five years ago, Joe invested
P 35 000 on simple interest at 5%. How much
is his money now?

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Example 2: Five years ago, Joe invested
P 35 000 on simple interest at 5%. How much
is his money now?

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Example 2: Five years ago, Joe invested
P 35 000 on simple interest at 5%. How much
is his money now?

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COMPOUND INTEREST

𝑡
𝐼 =𝑃 ( 1+𝑟 )
FUTURE VALUE

𝐹𝑉 =𝑃 +𝐼
Example 2: Mr. Malakas deposited P 5 000 on
the day his son was born. If the money is
worth 10% compounded yearly, how much
money will his son have on his 2nd birthday?

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Example 2: Mr. Malakas deposited P 5 000 on
the day his son was born. If the money is
worth 10% compounded yearly, how much
money will his son have on his 2nd birthday?

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RISK-RETURN TRADE-OFF
In finance, we assume that individuals are risk averse
but have different levels of risk aversion. Risk aversion
means that individuals maximize returns for a given
level of risk or minimize risk if the returns are the
same. Risk-averse individuals would require a higher
return if the risk level increases.

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RISK-RETURN TRADE-OFF
In general, the riskier the investment, the
higher the potential return should be,
indicating a direct relationship between risk
and potential return. As a business owner
you should know to balance the risk and
the potential return of your investments.

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 RISK-RETURN TRADE-OFF
Risk is defined here as the uncertainty of
returns. One way to reduce risk to an
acceptable level is through diversification
wherein you invest in different types of
investments with different risks and returns.
This is an application of the saying: “ Don’t
put all your eggs in one basket.”
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𝑅𝐸𝑉𝐼𝐸𝑊
REVIEW

What is the formula

for Simple Interest?

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REVIEW
What is the formula
for Compound
Interest?
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REVIEW

What is the difference

between Simple and
compound interest?
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REVIEW

How do we compute
for the future value of
money?
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REVIEW

Give example of
high risk
investment. 33
REVIEW

Give example of
low risk
investment. 34
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7. Shawn is buying a new Jet Ski for $12,500. He is
considering two credit options. Option A offers  a 6
year loan with 8.5% interest compounded quarterly,
while Option B offers a 5 year loan with 10% interest
compounded annually. Which is the better option
and how much will he save?

B; $573.83 A; $573.83 B; 495.21 B; 495.21

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Thank you
for
listening!
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ASSIGNMENT

Explain on how you will use

computations of simple,
compound interest and future
value to determine the risk of an
investment