BONDS

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AMORTIZATION
Ms. Rodriguez invested in a ₱2,000 bond with a
coupon rate and effective rate of 5%. How much
is the issue price?
You have a one year ₱1,000 bond with a coupon rate
of 5% and was offered at an effective rate of 6%.
How much is the issue price?
We have a ₱100,000 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?
We have a ₱100,000 bond with a stated rate of 10%
and effective rate (required rate of return) of 8%, that
pays interest semi-annually and has a maturity of 3
years. At what price should the bond be issued?
 EFFECTIVE
RATE OF INTEREST
Nominal rate is the rate quoted in describing a
given variety of compound interest. Consider a
bank deposit of ₱1,000 to earn 6% compounded
quarterly. After one year, the compound amount F
is:
Notice that the interest earned is ₱61.36 representing 6.136% of ₱1,000 (not 6% of ₱1,000). For this case,
6% (compounded quarterly) is called the nominal rate and 6.136% is the effective rate.

Thus, the effective rate of interest (ER) is the actual interest earned in one year period. This can be computed
by
If interest is paid at a rate of 5% per year, compounded
quarterly, what is the effective rate?
What nominal rate compounded monthly is equivalent
to 12% compounded quarterly?
STEPS IN FINANCIAL
PLANNING
STEPS IN FINANCIAL PLANNING
 EASY
(1 POINT)
It is the concept that money you have now is worth
more than the identical sum in the future due to its
potential earning capacity.

A. Value of money
B. Time value of money
C. Future value of money
D. All of these
What is the value of a current asset at a future date
based on an assumed rate of growth?

A. Future value of money

B. Present value of money
C. Time value of money
D. None of these
Which comes first in the financial planning process?

A. Identify goal-related tasks.

B. Set goals and objectives
C. Establish system for monitoring and evaluation.
D. Determine contingency plans
Stating that everything on the application is true and
correct and authorizing the lender to verify the
information provided with the identified contacts
and references.
A. Income or revenue
B. Assets and Liabilities
C. Contact or references
D.Attest and authorization require affixing
applicant’s signature on the credit application
These are companies in the financial sector
that provide a broad range of business and
services including banking, insurance, and
investment management.
A. Financial institutions
B. Financial Intermediaries
C. Financial instruments
D. Financial Market
The decision function of financial management can
be broken down into the decisions.
A. financing and investment
B. investment, financing, and asset management
C. financing and dividend
D. capital budgeting, cash management, and credit
management
Which step in the financial planning process when
you establish targets that you want to achieve in the
future?
A. Establish responsibility centers for accountability
and timelines.
B. Establish the evaluation system for monitoring and
controlling
C. Identify goal-related tasks.
D. Set goals or objectives
 AVERAGE
(2 POINTS)
Find a simple interest on P6800 for
3 years at 11% simple interest.
A man borrowed P10,000 from his friend
and agrees to pay at the end of 90 days
under 8% simple interest rate. What is
the required amount?
How long will it take P1,000 to amount
to P1346 if invested at 6% compounded
quarterly?
What are two components of an amortization
payment?
A. Interest and Principal
B. Interest and Payment Amount
C. Payment amount and Principal
D. Percent and Interest
Approximately how many years will it
take to double an investment at 5.87%
interest rate compounded quarterly?
The formula for finding the Present
Worth of Annuity
If interest is paid at a rate of 6%
compounded quarterly, what is the
effective rate? Express your answer in
percentage form.
 DIFFICULT
(3 POINTS)
If $500 is invested now, $700 two years
from now, and $900 four years from
now, all at 4%, what will be the total
amount in 10 years?
Which of the following is a leap year?

a. 2005
b. 1900
c. 3000
d. 4000
What is the exact simple interest on
$1500 for the period from January 15 to
October 24,1996 at 14% interest?
What nominal rate compounded monthly
is equivalent to 13% compounded
quarterly? Express your answer in two
decimal places and in percentage form.
Is an interest which is based on the current account
or on the original capital plus the accumulated
interest.
MATHEMATICAL CONCEPTS
AND TOOLS FOR FINANCE,
INVESTMENT PROBLEMS
AND RISK RETURN TRADE
OFF
 LEARNING COMPETENCIES:
• Apply mathematical concepts and tools in computing
for finance and investment problems (ABM_BF12-IIIg-
h-21)

• Explain the risk-return trade-off (ABM_BF12-IIIg-h-22))

 OBJECTIVES:
K: Define capital budgeting, internal rate of return and
risk return trade-off;
S: Create an analysis of the risks and returns of long-
term investments based on payback period and net
present value;
A: Appreciate the importance of understanding capital
budgeting, internal rate of return and risk- return trade-
off.
 CAPITAL BUDGETING
• Is the process of identifying, evaluating,
planning and financing capital
investments projects of an organization
NET INVESTMENT
NET RETURNS
 COMMONLY USED
METHOD OF EVALUATING
CAPITAL INVESTMENTS
 METHODS THAT DO NOT
CONSIDER THE TIME VALUE
OF MONEY
NET PRESENT
VALUE
P.I >1, NPV>0, ACCEPTED
P.I<1, NPV<0, REJECTED
P.I=1, NPV=0
Lastrella invest $40,000 in a business project. This
business pays her $12,000 at the end of each year for
the next 5 years at which point she sells her business for
$20,000. Prevailing interest rates are currently 5%

a.) What is the net present value for this project ?

b.) Is it worth investing in?
c.) Calculate the profitability index
d.) Determine the internal rate of return for this project.
A project with a 3 year life and a cost of $100,000
generates revenue of $25,000 in year 1, $45,000 in
year 2, and $65,000 in year 3. If the discount rate is
8%, what is the NPV of the project?

a.) What is the net present value for this project ?

b.) Is it worth investing in?
c.) Calculate the profitability index
d.) Determine the internal rate of return for this
project.
PROFITABILITY INDEX=

PRESENT VALUES OF FUTURE CASH INFLOWS

INITIAL CASH OUTFLOWS
COST OF CAPITAL
RATIO ANALYSIS AND
INTERPRETATION
 RATIO ANALYSIS
- Is a quantitative analysis technique applied by
an entity to be able to assess the company’s
liquidity, solvency, profitability, and operational
efficiency through scrutiny of account balances
reported in the balance sheet and income
statement.
LIQUIDITY
RATIOS
 LIQUIDITY RATIOS

- Determine whether an entity can be able to

pay for current liabilities as they become due
with the use of current assets.
LIQUIDITY RATIOS
CURRENT
RATIO
 current RATIO

Answers the questions:

Can the company pay for their
current liabilities with current assets?
FORMULA
CALCULATION
 INTERPRETATION
For both years, the entity’s current
assets are larger than current liabilities.
The entity can pay for their current
liabilities using their current assets since
the ratio is greater than 1.
Remember that…..
ACID TEST
RATIO
 ACID TEST RATIO

Answers the questions:

Can the company pay for their
current liabilities with quick assets?
FORMULA
CALCULATION
 INTERPRETATION
For both years, the entity’s quick assets
are larger than current liabilities. The
entity can pay for their current liabilities
using their quick assets since the ratio is
greater than 1.
Remember that…..
CASH
RATIO
 CASH RATIO

Answers the questions:

Can the company’s cash pay for their
current liabilities?
FORMULA
CALCULATION
 INTERPRETATION
For both years, the entity’s current
liabilities are larger than cash. The entity
cannot pay for their current liabilities
using their total cash since the ratio is
less than 1.
Remember that…..
SOLVENCY
RATIOS
 SOLVENCY RATIOS
- Determine whether an entity has more
ownership rather than debts. It is also called
leverage ratios. These ratios involve comparisons
of debt, asset, equity and interest.
solvency RATIOS
DEBT
RATIO
 DEBT RATIO

Answers the questions:

How much of the assets are financed
by debt?
FORMULA
CALCULATION
 INTERPRETATION
For 2020, 53.79% of assets are financed
by debt. For 2019, 65.03% of assets are
financed by debt. In both years, debt
is greater than equity since debt
ratios are both higher than 50%
 Remember that…..
-When debt ratio is less than 50%,
assets are financed more by equity.
-When debt ratio is greater than 50%,
assets are financed more by debt.
-When both debt and equity is 50%,
assets are financed equally by debt and
equity.
DEBT TO
EQUITY
RATIO
 DEBT TO EQUITY RATIO

Answers the questions:

Which has more weight? Debt or
equity?
FORMULA
CALCULATION
 INTERPRETATION
For both years, debt has more weight
than equity since both ratios are greater
than 1.
 Remember that…..
-When debt to equity ratio is less than 1,
equity has more weight than debt.
-When debt to equity ratio is greater than
1, debt has more weight than equity.
-When debt to equity ratio is equal to 1,
debt is equal to equity.
 Remember that…..
- Rising debt ratio means the company
resorts to more debt and more interest
expense.
- Falling debt ratio means the company is
shifting more to equity financing
TIME INTEREST
EARNED
RATIO
 TIME INTEREST EARNED
RATIO
Answers the questions:
How many times can an entity pay for
interest expenses with their
operating income?
FORMULA
CALCULATION
 INTERPRETATION
The company’s operating income can
cover interest payments for 150 times.
 Remember that…..
- The higher the TIE ratio, the better. It
shows how the company is able to meet
its interest obligation with the income
that it earns.
EFFICIENCY
RATIOS
 EFFICIENCY RATIOS

- Measures how well does an entity utilizes

their assets and resources to generate income.
efficiency RATIOS
 ASSSET
TURNOVER
RATIO
 ASSET TURNOVER RATIO
Answers the questions:
How many times can an entity
generate sales with their total asset
resources?
FORMULA
CALCULATION
 INTERPRETATION
The company’s assets can only generate
sales 0.32 times.
 Remember that…..
- The higher the asset turnover ratio, the
better. It shows how the company is
able to generate sales from their
resources.
INVENTORY
TURNOVER
RATIO
inventory TURNOVER RATIO
Answers the question:
How many times can an entity sell
their inventories and have replaced
within a period?
FORMULA
CALCULATION
 INTERPRETATION
The company’s inventory turnover is
low.
 Remember that…..
- A low turnover might mean weak sales
and excess inventory.

- A high turnover might mean strong

sales and insufficient inventory.
DAYS SALES IN
INVENTORY
Answers the questions:
How many days does an entity holds
on to their inventory before a sales
transaction?
FORMULA
CALCULATION
ACCOUNTS RECEIVABLE
TURNOVER
RATIO
 ACCOUNTS RECEIVABLE
TURNOVER RATIO
Answers the question:
How many times can an entity turn
their receivables to cash for a certain
period?
FORMULA
CALCULATION
 INTERPRETATION
In a period, the company turns
receivables into cash 5.20 times
over the whole period.
 Remember that…..
- A low turnover signals weak
collection efforts.

- A high turnover signals strong

collection efforts.
DAYS in receivables
Answers the questions:
How many days does an entity
wait for a receivable to become
cash?
CALCULATION
PROFITABILITY
RATIOS
 PROFITABILITY RATIOS

- Measures how well does an entity

generate income that relates to their
revenues, operating costs, assets and
capital.
PROFITABILITY RATIOS
GROSS PROFIT
RATIO
 GROSS PROFIT RATIO
Answers the question:
How much gross profit does the
company makes after considering
cost of goods that were sold?
FORMULA
CALCULATION
 INTERPRETATION

59.23% of sales is the

entity’s gross profit.
 Remember that…..
- Gross profit ratio
represents the amount of
gross profit for every P1.00
sale.
RETURN ON
ASSETS
RATIO
RETURN ON ASSETS RATIO
Answers the question:
How much income was
“returned” in the usage of
assets to generate profit?
FORMULA
CALCULATION
 INTERPRETATION

The entity enjoyed 10.63%

returns in the usage of its
assets to generate profit.
 Remember that…..
- The higher the returns the
better.
RETURN ON
EQUITY
RATIO
RETURN ON EQUITY RATIO
Answers the question:
How much income was
“returned” in the usage of
equity to generate profit?
FORMULA
CALCULATION
 INTERPRETATION

The entity enjoyed 23%

returns to the shareholders
investments.
 Remember that…..
- The higher the returns the
better.
 WHY ARE RATIOS SO
IMPORTANT IN
FINANCIAL ANALYSIS?
RISK RETURN
TRADE OFF
Learning Competency
The learners shall be able to measure and list
ways to minimize or reduce investment risks in
simple exercises.
Specific Learning Outcomes
At the end of this lesson, the learners will be able
to:
• Measure the risk of different types of
investments.
• Identify ways on how to reduce investment risk
and define how risk is lessened.
If you have 10,000 right
now, where will you
invest it?