Basic Long-term

Financial Concepts
Group 4
R e p o r t e r s :

L a b a d i a
G e n e r o s a
L a u g l a u g
M a l a n g
G u t i e r r e z
A l i t
Part 01 Simple and
Compound Interest

Part 02 Concepts of
Time Value of Money
Part 03 Loan
Amortization
Part 04 Conventional
Cashflow
Part 05 Concepts of
Risk and Return and
trade-off
 01
Simple and Compound Interest
Simple and Compound Interest

Interest

Interest is the cost of borrowing money,

where the borrower pays a fee to the
lender for using the latter's money. The
interest, typically expressed as a
percentage, can be either simple or
compounded.

Simple interest is based on the

principal amount of a loan or
deposit, while compound interest
is based on the principal amount
and the interest that accumulates
on it in every period.
Simple interest is calculated using the following
formula:​

Simple Interest=P×r×n
where:

P=Principal amount
r=Annual interest rate
n=Term of loan, in years
Compound interest accrues and is added to the
accumulated interest of previous periods; it includes
interest on interest, in other words. The formula for
compound interest is:

Compound Interest=P×(1+r) t −P
where:
P=Principal amount
r=Annual interest rate
t=Number of years interest is applied
 02
Concepts of Time Value of
Money
Concepts of Time Value of Money

Time Value of
Money
The time value of money (TVM) is the
concept that money available at the
present time is worth more than the
identical sum in the future due to its
potential earning capacity.

This core principle of finance holds that

provided money can earn interest, any
amount of money is worth more the
sooner it is received. TVM is also
sometimes referred to as present
discounted value.
The time value of money draws from the idea that rational
investors prefer to receive money today rather than the
same amount of money in the future because of money's
potential to grow in value over a given period of time.

For example, money deposited into a savings account

earns a certain interest rate and is therefore said to be
compounding in value.
The most fundamental TVM formula takes into account the
following variables::

FV = Future value of money

PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years

Based on these variables, the formula for TVM is:

FV = PV x [ 1 + (i / n) ] (n x t)
 03
Loan Amortization
Loan Amortization

Amortization refers to
the reduction of a debt
over time by paying the
same amount each
period, usually monthly.
With amortization, the
payment amount
consists of both principal
repayment and interest
on the debt.
1. Gather the
information you need to
calculate the loan’s
amortization.
2. Set up a
spreadsheet.
3. Calculate the interest
portion of the monthly
payment for month one.
4. Compute the
principal portion of the
payment for month one.
5. Use the new principal
amount at the end of
month one to calculate
amortization for month
two.
6. Determine the
principal repayment for
month two.
 04
Conventional
Cashflow
Conventional Cash Flow

A series of inward and outward

cash flows over time in which
there is only one change in the
cash flow direction
 05
Concepts of Risk and Return and trade-off
Concepts of Risk and Return

Risk

Risk in investment from

investor's view implies that the
actual return may not be as
expected. From the point of
view of a firm, when the actual
return is not same as estimated,
it is considered as risk. Higher
the variations in results, higher
is the risk and vice-versa.
 Types of Risk Involved in Investments

Capital Risk Income

It refers to a capital
Risk
It refers to variations in
loss because of fall in return from a security.
the the market price of For E.g. In case of
a security like Equity Equity Shares
Shares dividends vary every
Default Risk year.

Default It refers to default in

Risk
payment of interest or
repayment of the principal
amount by the company
Concepts of Risk and Return

Return
Return means “the motivating force and
the principal reward in the investment
process.” Return can be realized or
expected.

Realized return refers to the return which

was earned or could have been earned.

Expected return refers to the return

which the investor expected to earn in the
future.

The return is calculated as a percentage

on the initial amount invested.
In concept of risk and return, Returns always comes in the given
forms:

• The investor should get safety on the investment that he

has invested.

• There must be hassle-free deals should be available to the

investor in buying and selling of his investment.

• The investor should get liquidity on their investment.

• There are possibilities of fund's appreciation.

Risk-Return Trade-off

What is Risk-Return Tradeoff?

The risk-return tradeoff states that the

potential return rises with an increase in
risk.
Using this principle, individuals
associate low levels of uncertainty with
low potential returns, and high levels of
uncertainty or risk with high potential
returns.
According to the risk-return tradeoff,
invested money can render higher
profits only if the investor will accept a
higher possibility of losses.
Thank you

Reporters

Labadia
Generosa
Lauglaug
Malang
Gutierrez
Alit