1. The document discusses basic long-term financial concepts including simple and compound interest, time value of money, loan amortization, conventional cash flows, and concepts of risk and return. 2. Simple interest is calculated using the principal amount, annual interest rate, and term of the loan in years. Compound interest accrues and is added to previous accumulated interest over time. 3. The time value of money concept recognizes that money available now is worth more than the same amount in the future due to its potential for growth.

1. BASIC LONG-TERM
FINANCIAL
CONCEPTS
GROUP 3:
REPAL,FERLYN JANE G.
DUERME, ROSELYN A.
GETALAN,SHIELA MAE
GETIZO, GRETCHEN
DANIOT, ALEXANDER
CAPIN, RUTCHEL
VILLEGAS, JOE

2. 1.Simple and Compound Inter

3. 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.

4. 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

5. 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.

6. 2. Concepts of Time Value of
Money

7. 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.

8. The time value of money draws from the idea that rational
investors prefer to receive money today rather than thesame
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.

9. The most fundamental TVM formula
takes into account thefollowing
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)

10. 3. Loan Amortization

11. Loan Amortization
Amortization refers tothe reduction of a
debtover time by paying thesame amount
eachperiod, usually monthly.With
amortization, thepayment amountconsists of
both principalrepayment and intereston the
debt.

13. 2.Set up
aspreadsheet.

14. 3. Calculate the
interest portion
of the monthly
payment for
month one.

15. 4.
Compute the
principal
portion of the
payment for
month one.

16. 5. Use the new
principal amount
at the end of
month one to
calculatea
mortization for
month two.

17. 6. Determine
the principal
repayment for
month two.

18. 4. Conventional Cash Flow

19. Conventional Cash Flow
A series of inward and outwardcash flows
over time in whichthere is only one change in
thecash flow direction

21. 5. Concepts of risk and Return and
Trade-off

22. 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.

23. Types of Risk Involved in
Investments
Capital Risk
• It refers to a capital loss
because of fall in the the
market price of a security
like Equity
Shares.IncomeRisk
• It refers to variations
inreturn from a security.For
E.g. In case ofEquity
Sharesdividends vary
everyyear.
Default Risk
It refers to default inpayment
of interest orrepayment of
the principalamount by the
company

24. Concepts of Risk and Return
Return
Return means “ the motivating force and the principal reward in
the investment process. ” Return can be realized orexpected.
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.

26. Risk-Return Trade-off
What is Risk-ReturnTrade off?
The risk-return trade off states that the potential
return rises with an increase in risk.
Using this principle,individuals associate low level so
fun certainty with low potential returns,and high
levels of uncertainty or risk with high potential
returns.
According to the risk-return trade off,invested money
can render higher profits only if the investor will
accept a higher possibility of losses