The document discusses key concepts related to investing, including: 1) Investing involves committing money for a period of time to earn future payments that compensate for time, inflation, and uncertainty. 2) Compounding is the process of generating earnings on reinvested earnings, which amplifies growth over time. 3) The time value of money recognizes that money available now is worth more than the same amount in the future due to its potential earning capacity. 4) Future value and present value calculations allow investors to determine the worth of investment amounts over time periods.

1. The Concept of Investing
FM 6
November 4, 2022

2. Why do we invest?

3. Why do we invest?
E
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Money
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4. Why do we invest?

5. Why do we invest?

6. Why do we invest?

7. Why does money grow?

8. Why do we invest?

9. Why do we invest?

10. ● Current commitment of money for a period of time
in order to derive future payments that will
compensate the investor for:
○ The time the funds are committed
○ The expected rate of inflation
○ The uncertainty of the future payments
● Commitment of capital to an endeavor with the
expectation of obtaining additional income or profit
Investment

11. Concept of
Compounding

12. ● “Greatest mathematical discovery of all time.”
● The process of generating earnings on an asset’s
reinvested earnings.
● Amplifies the growth of money and maximizes the
earnings potential of investments.
● Two requirements to work:
○ Reinvestment of earnings
○ Time
Compounding

13. ● P = 10,000
● i = 5%
Compounding
Principal Interest
1 10,000 500
2 500
3 500
4 500
5 500
Total 2,500
Principal Interest
1 10,000 500
2 10,500 525
3 11,025 551.25
4 11,576.25 578.82
5 12,155.07 607.75
Total 2,762.82
12,500 12,762.82
262.82

14. Time Value of
Money

15. P10,000 now
or next year?
Time Value of Money

16. P10,000
now
Time Value of Money
January 1,2022 10,000
January 1,2023 10,500
January 1,2022 0
January 1,2023 10,000
P10,000
next year

17. Time Value of Money
● The idea that money available at the present is
worth more than the same amount in the future
due to its potential earning capacity.
● The increase in the value of current money in the
future.
● Provided that money can earn interest, any amount
is worth more the sooner it is received.
● Core principle of Finance.

18. Future Value
● Value of present money expected to increase in the
future as a result of investing and gaining interest over
a period of time
● P=10,000
● i=5%
Yr Principal Interest FV
1 10,000 500 10,500
2 10,500 525 11,025
3 11,025 551.25 11,576.25
4 11,576.25 578.82 12,155.07
5 12,155.07 607.75 12,762.82

19. Future Value
FV = P x (1+i)n
FV = 10,000 x (1 + 0.05)5
FV = 12,762.82

20. Future Value
● Shorter compounding periods also amplify future value
● P=10,000
● i=5% Yr Principal Interest FV
1 10,000 500 10,500
SA Principal Interest FV
1 10,000 250 10,250
2 10,250 256.25 10,506.25
Q Principal Interest FV
1 10,000 125 10,125
2 10,125 126.56 10,251.56
3 10,251.56 128.14 10,379.70
4 10,379.70 129.75 10,509.45

21. Future Value
● Annual
○ FV=10,000 x (1+0.05)1
= 10,500
● Semi-annual
○ FV=10,000 x (1+(0.05/2))2
○ =10,000 x (1.025)2
= 10,506.26
● Quarterly
○ FV=10,000 x (1+(0.05/4))4
○ =10,000 x (1.0125)4
= 10,509.45

22. Present Value
● The current worth of a future sum of money or stream of
cash flows given a specified rate of return.
● What your investment gives you now if you were to spend it
today
● P=10,000
● i=5%
Yr Principal Interest FV
1 10,000 500 10,500
2 10,500 525 11,025
3 11,025 551.25 11,576.25
4 11,576.25 578.82 12,155.07
5 12,155.07 607.75 12,762.82
PV=10,000

23. Present Value
Yr Principal Interest FV
1 10,000 500 10,500
2 10,500 525 11,025
3 11,025 551.25 11,576.25
4 11,576.25 578.82 12,155.07
5 12,155.07 607.75 12,762.82 PV=10,000

24. P10,000 now
or
P12,000 in 5 years?
PV=9,402.31
Time Value of Money

25. P10,000 now
or
P15,000 in 5 years?
PV=11,752.89
Time Value of Money

26. Time Value of Money
● “Time is money.”
● Value of the money you have now is not the
same in the future.
● Important so that you can distinguish the
worth of investments that offer returns at
different times.

27. Time Value of Money
● How long will it take to earn P20,000?
○ FV = PV (1+i)n
○ FV = 10,000 (1+0.05)n
○ use trial and error:
○ if n = 10; FV = 16,289
○ if n = 15; FV = 20,789.28
○ if n = 14; FV = 19,799.32
● more than 14 years but less than 15 years

28. Time Value of Money
● If you had 5 years, how much interest is needed
to earn P20,000?
○ FV = PV (1+i)n
○ 20,000 = 10,000 (1+i)5
--------- ---------------
10,000 10,000
○ 21/5
= 1+i
● i = 14.87%

29. Thank You!
Commit your work to the Lord, and your plans will be established.
- Proverbs 16:3