Present & Future Value

Present & Future Value
Ms. Joselyn M. Amon

Prayer
Objectives:
• Distinguish simple and compound interest.
• Compute for the effective annual rate.
• Solve exercises and problems in computing for
the time value of money with the aid of
present and future value tables.
Video Presentation
Distinguish simple and compound interest
• Simple Interest – the charging interest rate r based on a

principal P over T number of years.
Interest = P x r x T
• Compound Interest - the interest in the first compounding
period is added on the principal, which will then be the basis for
the interest to be computed for the next period. The formula
below shows the summary of the effects of adding on the
interest, where m is the compounding frequency.
Distinguish simple and compound interest
• • Compounding Frequency- the number of

times interest is computed on a certain
principal in one year. If the investment pays
semi-annually the formula is:
Interest = ( P x (1 + r/s)(t x s) – P
Future Value and Present Value
• Future Value - the amount to which an
investment will grow after earning interest
• Present Value - the amount you have to invest
today if you want to have a certain amount of
cash flow in the future
The present value of a single amount.
Example: You need P25,000.00 to buy a laptop

when you enter into college 2 years from now.
How much must you invest now if the interest
rate is at 6% per annum?
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have
PHP25,000.00 by the end of 2 years.
Sample Problem
• Find the interest on a used car loan of P5000
at a rate of 16% for a period of 8 months
• Find the amount owed on an investment of
P10,000 into a money market account that
pays a simple interest rate of 1.75% over a 39
wk period.
• Find the amount due on a loan of P600 at
15.75% interest after 21 months
Future Value
• Suppose that you choose to put your savings
annually in MRI bank at 8% per annum. For
today, you put PHP1,200, on the second year
PHP1,400, and PHP1,000 for the third year.
How much will you have available at the end
of three years?
Future Value
Present Value
• Suppose that you can buy a phone for PHP8,000 down
payment with 4,000 for each of the next two years or pay
PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
Present and future value of annuity
• Two types of Annuities

• Ordinary annuity payments are made at the
end of each period (usually annually),
• Annuity due, the cash flow occurs at the
beginning of each period.
Future Value of an Ordinary Annuity
• Let's assume that you invest $1,000 every year for the next
five years, at 5% interest. Below is how much you would have
at the end of the five-year period.
Future Value of an Ordinary Annuity
Present Value of an Ordinary Annuity
• Using the same example of five $1,000

payments made over a period of five years,
here is how a present value calculation would
look. It shows that $4,329.58, invested at 5%
interest, would be sufficient to produce those
five $1,000 payments.

Future Value of an Annuity Due
Future Value of an Annuity Due
Present Value of an Annuity Due
Present Value of an Annuity Due
Loan amortization using mathematical
concepts and the present value tables
• A loan is money lent at an interest rate for a
certain period of time. Loans are normally
secured from different financial institutions,
the most common of which, are banks.
• A bond is also a form of loan, but can be
traded through Philippine Dealing and
Exchange (PDEX) System.
Differentiate discount from premium bond pricing.
• Bonds issued at a discount

When bonds are issued below the face or par value,
they are said to be issued at a discount. A discount
occurs when the required rate of return is greater than
the nominal rate of return.
For example, let’s say we have a PHP100,000 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 need to compute for the amount of
interest payment per semi-annual period
which is equal to 100,000 x 10% x 6/12 =
5,000. The total period is 6 (3 years x 2) and
the discount rate to be used is 6% (12%/2).

Present & Future Value

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Present & Future Value

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Present & Future Value

Ms. Joselyn M. Amon

• Simple Interest – the charging interest rate r based on a

• • Compounding Frequency- the number of

Example: You need P25,000.00 to buy a laptop

• Two types of Annuities

• Using the same example of five $1,000

• Bonds issued at a discount

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