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Simple Interest
Simple Interest
• A fixed percentage of the principal (the total amount invested) paid to a depositor or an investor each
year the principal is left on deposit or has been invested; usually denoted by 𝐼𝐼
• Fixed amount paid to a bank or any lender (one who gives money to a borrower) each year the principal
has been borrowed
• Formula: 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑥𝑥 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑥𝑥 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 or simply 𝐼𝐼 = 𝑃𝑃𝑃𝑃𝑃𝑃
Where:
𝐼𝐼 - Simple Interest
𝑃𝑃 - Principal
𝑟𝑟 - Rate
𝑡𝑡 - Time
Then the final amount or Maturity value (𝐹𝐹) at the end of 𝑡𝑡 years can be solved using
𝐹𝐹 = 𝑃𝑃 + 𝐼𝐼
Derived Formulas
𝐼𝐼
1. 𝑃𝑃 =
𝑟𝑟𝑟𝑟
𝐼𝐼
2. 𝑟𝑟 =
𝑃𝑃𝑃𝑃
𝐼𝐼
3. 𝑡𝑡 =
𝑃𝑃𝑃𝑃
4. 𝐹𝐹 = 𝑃𝑃 + 𝐼𝐼
= 𝑃𝑃 + 𝑃𝑃𝑃𝑃𝑃𝑃
𝐹𝐹 = 𝑃𝑃(1 + 𝑟𝑟𝑟𝑟)
Example 1: If ₱1,500 was borrowed at 8% simple interest, how much will the interest be for 2 years?
Given: 𝑃𝑃 = ₱1,500; 𝑟𝑟 = 8% 𝑜𝑜𝑜𝑜 .08; 𝑡𝑡 = 2 years
Find: 𝐼𝐼
Example 2: If ₱300 is the interest at 9% after 4 months, how much was borrowed?
4 1
Given: 𝐼𝐼 = ₱300; 𝑟𝑟 = 9% 𝑜𝑜𝑜𝑜 .09; 𝑡𝑡 = 𝑜𝑜𝑜𝑜 year
12 3
Find: 𝑃𝑃
Example 3: If ₱1,912.50 is the interest for investing ₱9,000 for 2 years and 6 months, find the rate of interest.
Given: 𝐼𝐼 = ₱1,912.50; 𝑃𝑃 = ₱9,000; 𝑡𝑡 = 2.5 years
Find: 𝑟𝑟
Example 4: Accumulate ₱8,000 for 1 year and 6 months at 10% simple interest.
Given: 𝑃𝑃 = ₱8,000; 𝑡𝑡 = 1.5 years;𝑟𝑟 = 10% 𝑜𝑜𝑜𝑜 .1
Find: 𝐹𝐹
Simple Discount
Discount 𝐷𝐷 is a deduction from maturity amount 𝐹𝐹 of an obligation allowed for paying it currently. The formula
is 𝐷𝐷 = 𝐹𝐹𝐹𝐹𝐹𝐹, where:
𝐷𝐷 − discount
𝐹𝐹 − amount of maturity
𝑑𝑑 − discount rate
𝑡𝑡 − time or term of discount
Example:
Find the present value of ₱2,000, which is due at the end of 90 days at 5% simple discount.
1
Given: 𝐹𝐹 = ₱2,000; 𝑡𝑡 = ; 𝑑𝑑 = .05
4
Actual Time
This is the actual number of days between two (2) dates.
Approximate Time
This method considered that there were 30 days in each month or 360 days in one (1) year.
Example 1: A note dated February 28 is due to be paid August 1. How many days will the note run?
Example 2: Find the due date for a 130-day note dated July 7.
Example 3: Determine the actual time and approximate time from March 3, 2015 to September 10, 2015.
Example 1: Find the interest on ₱28, 700 at 7.3% from March 14, 2016 to August 16, 2016 using the following:
a. ordinary interest using actual time c. exact interest using actual time
b. ordinary interest using approximate time d. exact interest using approximate time
Solution:
Given: 𝑃𝑃 = ₱28,700 𝑟𝑟 = 7.3% = 0.073
The first step is to determine the approximate time and actual time of the term, then compute for the ordinary
interest and exact interest.
Month Actual Time Approximate Time
March 14, 2016 31-14=17 30-14=16
April 30 30
May 31 30
June 30 30
July 31 30
August 16, 2016 16 16
Total 155 152
Compound Interest
Compound Interest is interest computed on the sum of the original principal of a deposit or loan and the interest
accumulated. It is denoted by 𝐼𝐼𝑐𝑐 .
The frequency of conversion, denoted by 𝑚𝑚, is the number of times that the interest is computed in the span
of one (1) year. The time or the number of years of the term compounded interest is denoted by 𝑡𝑡. Thus, the
total number of conversion periods for the entire term, denoted by 𝑛𝑛, is the product of the number of years 𝑡𝑡 and
the frequency of conversion 𝑚𝑚.
𝑛𝑛 = 𝑡𝑡𝑡𝑡
The following table shows the different values of 𝑛𝑛 given a particular frequency conversion 𝑚𝑚 and time 𝑡𝑡.
Total Number of Conversions for the Entire Term at Various Conversion Periods
Frequency of
Description Conversion Period Time (𝑡𝑡) Value of 𝑛𝑛
Conversion (𝑚𝑚)
Annually 1 year 1 year 1 1
Semiannually 6 months 3 years 2 6
Quarterly 3 months 2 years 4 8
Monthly 1 month 5 years 12 60
The value of 𝑛𝑛 (total number of conversions for the entire term) is dependent of 𝑚𝑚 (frequency of conversion). If
the term 𝑡𝑡 is kept constant, 𝑛𝑛 increases as 𝑚𝑚 increases. Similarly, 𝑛𝑛 is also dependent on 𝑡𝑡. If 𝑚𝑚 is held constant,
𝑛𝑛 increases at 𝑡𝑡 increases.
First, determine the nominal rate, or the rate charge that may be converted several times per year, say
semiannually. This type of rate is denoted by 𝑗𝑗. For example, you are investing ₱36,000 for 5 years in a bank
that pays 3% compounded semiannually. The nominal rate 𝑗𝑗 is 3% or 0.03.
Now, to get the interest per period, denoted by 𝑖𝑖, divide the nominal rate by the frequency of conversion per
year as follows:
𝑗𝑗
𝑖𝑖 =
𝑚𝑚
The following table shows the different interest rates per period given a particular nominal rate:
Example 1
If Mrs. De Leon invested ₱12,900 for 4 years in a bank that pays 3% compounded semiannually, how much will
she receive after 4 years?
Given: 𝑃𝑃 = ₱12,900; 𝑡𝑡 = 4 years; 𝑚𝑚 = 2; 𝑗𝑗 = 0.03
Solution: First solve for 𝑖𝑖 and 𝑛𝑛.
𝑗𝑗 0.03
𝑖𝑖 = = = 0.015 and 𝑛𝑛 = 𝑡𝑡𝑡𝑡 = 4(2) = 8
𝑚𝑚 2
Since the total number of conversion periods in 4 years is 8 and the interest rate per period is 1.5% or 0.015, it
follows that
𝐹𝐹 = 𝑃𝑃(1 + 𝑖𝑖)𝑛𝑛
= (₱12,900.00)(1 + 0.015)8
= ₱14,531.75.
Mrs. De Leon will receive ₱14,531.75 after 4 years.
Example 3
Find the compound interest earned at the end of 20 months if ₱150,000 is invented in a fund that pays 20%
compounded monthly.
Given: 𝑃𝑃 = ₱150,000; 𝑗𝑗 = 20% 𝑜𝑜𝑜𝑜 0.2; 𝑚𝑚 = 12; 𝑡𝑡 = 20 months’
Solution: First solve for the interest rate per period.
𝑗𝑗
𝑖𝑖 =
𝑚𝑚
0.2
=
12
�����
= 0.01666
20
Next, solve for the total number of conversion periods. Note that 𝑡𝑡 = 20 months means 𝑡𝑡 = years.
12
𝑛𝑛 = 𝑡𝑡𝑡𝑡
20
= � � (12)
12
= 20
Compute the compound amount.
𝐹𝐹 = 𝑃𝑃(1 + 𝑖𝑖)𝑛𝑛
= ₱150,000(1 + 0.01666)20
= ₱208,767.53
Lastly, compute for the compound interest.
𝐼𝐼𝑐𝑐 = 𝐹𝐹 − 𝑃𝑃
= ₱208,767.53 − ₱150,000
= ₱58,767.53
The compounded interest earned for ₱150,000.00 invested in a fund that pays 20% compounded monthly at
the end of 20 months is ₱58,767.53.
Example 4
Accumulate ₱30,000 for 3 years and 6 months at 16% compounded semiannually.
6
Given: 𝑃𝑃 = ₱30,000; 𝑡𝑡 = 3 years; 𝑗𝑗 = 16% (𝑚𝑚 = 2)
12
Solution: To accumulate means to find the compound amount. First, solve for the interest per period.
𝑗𝑗 0.16
𝑖𝑖 = = = 0.08
𝑚𝑚 2
Next, solve for the total number of conversion periods.
6
𝑛𝑛 = 𝑡𝑡𝑡𝑡 = �3 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦� (2) = (3.5)(2) = 7
12
Compute the compound amount.
𝐹𝐹 = 𝑃𝑃(1 + 𝑖𝑖)𝑛𝑛
𝐹𝐹 = ₱30,000.00(1 + 0.08)7 = ₱51,414.73
1
The compound amount at the end of 3 years of ₱30,000.00 invested at 16% (m=2) is ₱51,414.73.
2
Example 5
3
If ₱1.5 million is invested in a fund that pays 23 % compounded monthly for 10 years and 8 months, how much
4
will be in the fund at the end of the term?
3
Given: 𝑃𝑃 = ₱1,500,000 𝑗𝑗 = 23 %
4
𝑚𝑚 = 12 𝑡𝑡 = 10 years and 8 months
Solution: First, solve for the interest per period 𝑖𝑖.
3
𝑗𝑗 23 % 23.75% 0.2375
𝑖𝑖 = = 4 = = = 0.01979
𝑚𝑚 12 12 12
Next, solve for the total number of conversion periods.
8
𝑛𝑛 = 𝑡𝑡𝑡𝑡 = �10 � (12) = 128
12
Compute the compound amount.
𝐹𝐹 = 𝑃𝑃(1 + 𝑖𝑖)𝑛𝑛
𝐹𝐹 = ₱1,500,000.00(1 + 0.01979)128
𝐹𝐹 = ₱18,431,385.42
3
If ₱1.5 million is invested for 10 years and 8 months in a fund that pays 23 % compounded monthly, the
4
compound amount at the end of the term is ₱18,431,385.42.
Example 6
What is the present value of ₱35,000 due in 7 years and 6 months if the rate is 12% compounded quarterly?
Given: 𝐹𝐹 = ₱35,000; 𝑡𝑡 = 7 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑎𝑎𝑎𝑎𝑎𝑎 6 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠 𝑜𝑜𝑜𝑜 7.5 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦; 𝑗𝑗 = 12% = 0.12; 𝑚𝑚 = 4
Solution: Solve for 𝑖𝑖 and 𝑛𝑛.
𝑗𝑗 0.12
𝑖𝑖 = = = 0.03
𝑚𝑚 4
𝑛𝑛 = 𝑡𝑡𝑡𝑡 = (7.5)(4) = 30
Substitute the values of 𝐹𝐹, 𝑖𝑖, and 𝑛𝑛 in the formula for 𝑃𝑃.
𝐹𝐹 ₱35,000
𝑃𝑃 = = = ₱14,419.54
(1 + 𝑖𝑖) 𝑛𝑛 (1 + 0.03)30
Another way to solve the problem is by using the equivalent formula for 𝑃𝑃,
𝑃𝑃 = 𝐹𝐹(1 + 𝑖𝑖)−𝑛𝑛
= ₱35,000(1 + 0.03)−30
= ₱35,000(1.03)−30
= ₱14,419.54
The present value of ₱35,000.00 that is due at the end of 7.5 years is ₱14,419.54.
Example 7
A certain principal 𝑃𝑃 was invested at 6% compounded semiannually. If this principal amounted to ₱94,500 at
the end of 3 years, how much was the principal? Find the compound interest earned.
Given: 𝐹𝐹 = ₱94,500; 𝑡𝑡 = 3 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦; 𝑗𝑗 = 6% 𝑜𝑜𝑜𝑜 0.06; 𝑚𝑚 = 2
Solution: Solve first for 𝑖𝑖 and 𝑛𝑛.
𝑗𝑗 0.06
𝑖𝑖 = = = 0.03
𝑚𝑚 2
𝑛𝑛 = 𝑡𝑡𝑡𝑡 = (3)(2) = 6
Use the values of 𝐹𝐹, 𝑖𝑖 and 𝑛𝑛 to solve for 𝑃𝑃.
𝑃𝑃 = 𝐹𝐹(1 + 𝑖𝑖)−𝑛𝑛
= ₱94,500.00(1 + 0.03)−6
= ₱79,142.26
The compound interest 𝐼𝐼𝑐𝑐 is then computed as
𝐼𝐼𝑐𝑐 = 𝐹𝐹 − 𝑃𝑃
= ₱94,500.00 − ₱79,142.26
= ₱15,357.74
The present value of ₱94,500.00 that is due at the end of 3 years is ₱79, 142.26. The compounded interest that
the investment earned is ₱15,357.74.
In the Philippines, stocks are traded regularly at various marketplaces such as Philippines Stock Exchange
(PSE) and Market Stock Exchange (MSE). These are places where an investor can buy or sell stocks through
a licensed broker authorized to transact business in the market stock places.
Bonds
A bond is a certificate or a written contract in which the debtor promises to pay its holder a specified amount of
money, plus a certain rate of interest at a stated future date.
A company that needs money can borrow from investors by selling bonds. A bond is a debt covering a long
term such as 10, 20 or more years. The investor is the bondholder who is guaranteed to be repaid at a specified
future date.
Typical bonds which are issued in various denominators are payable at par value or face value at maturity date.
The par value or face value is the principal borrowed as stated in the bond.
The par value is usually the price the investor pays when buying the bond from the issuing company. An investor
may sell the bond at any time to another investor.
Bonds are traded among investors. Hence, the value of a bond fluctuates up and down during its lifetime,
depending on how many investors are willing to pay for it. The amount the investor actually pays for the bond
is called the market.
A bond is sold at par when it is sold at a price equal to the face or par value, and is sold at premium when it is
sold at a price higher than its face or par value. The bond is bought at a discount if it is bought for less than its
par value.
Common stocks is a class of corporate stock in which the investor has voting rights and shares directly in the
success or failure of the business.
A par value is an arbitrary monetary figure specified in the corporate charter for each share of stock and printed
on each stock certificate. The dividend for par value preferred stock is quoted as a percent of the par value.
Alternatively, a no-par value stock is a stock that does not have a par value and the dividend is quoted as a
peso amount per share.
Cumulative preferred stock is a type of preferred stock that receives a dividend each year. The dividend in
arrears is the amount of dividends that accumulate and are owned to cumulative preferred shareholders before
for past years in which no dividends are paid.
Preferred stocks are categorized as nonparticipating and participating. Nonparticipating stock means that
shareholders receive only fixed dividend, while participating stock means that the shareholders may receive
additional dividends if the company perform well. Convertible preferred means the stock may be exchanged
for a specified number of common shares in the future.
Example 1: The AUS Enterprises has 1,500,000 shares of common stock outstanding. If a dividend of
₱30,000,000 was declared by the company directors last year, what are the dividends per share of common
stock?
Solution:
Because the company has no preferred stock, the common shareholders will receive the entire dividends.
Given: 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 = ₱30,000,000
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) = 1,500,000
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) =
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑟𝑟 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐)
30,000,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) =
1,500,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) = ₱20 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
The dividend per share of stock is ₱20
Example 2: The board of directors of SSS, Inc. has declared a dividend of ₱18,000,000. The company has
40,000 shares preferred stock that pay ₱60 per share and 80,000 shares of common stock. Calculate the
amount of dividends due the preferred shareholders and the dividend per share of common stock.
Solution:
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺: 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝) = 40,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝) = ₱60
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) = 80,000
Example 3: Neri Corporation has 70,000 shares of ₱2,000 per value, 5% cumulative preferred stock and
250,000 shares of common stock. Although no dividend was declared last year, a ₱25,000,000 dividend was
declared this year. Determine the amount of dividends due the preferred shareholders and the dividend per
share of common stock.
Solution: Take note that preferred stock is cumulative and the company did not pay a dividend in the previous
year, the preferred shareholders are entitled to the dividends in arrears and the dividend for the current period.
Given: 𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = ₱2,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 5% = 0.05
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝) = 70,000
𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑟𝑟𝑟𝑟𝑟𝑟 (𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) = 250,000
𝑇𝑇ℎ𝑒𝑒 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑖𝑖𝑖𝑖
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝) = 𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 × 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) = 2,000(.05)
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝) = ₱100 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
Stock Valuation
Stock Valuation is the process of calculating the values of goods or materials owned by a company or available
for sale in a store at a particular time.
Example 4: If MMDN Corporation paid a dividend of ₱142.60 per share last year. If yesterday’s last price was
₱2,300, what is the current yield on the stock?
Solution:
Given: 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱142.60
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱2,300
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 =
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
142.60
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 =
2,300
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 = 0.062 𝑜𝑜𝑜𝑜 6.2%
Example 5: Calculate the current yield for MMDN Corporation stock, which pays a dividend of ₱70 per year and
is currently selling at ₱1,400 per share.
Solution:
Given: 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱70
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱1,400
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 =
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎
70
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 =
1,400
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 = 0.05 𝑜𝑜𝑜𝑜 5%
The current yield rate per share is 5%.
This means investors are currently willing to pay 30 times the earnings for one share of WSS stock.
Example 7: Sofia would like to own stocks in SSS and GSIS, but she does not know if either stock is a good
buy. One thing she can do is to look at the price-earnings ratio for each.
a. SSS, price share ₱2,464, annual net income per share ₱88, and
b. GSIS, price share ₱1,900, annual net income per share ₱76.
Solution:
Use the formula for price-earnings ratio to get
a. Price-earnings ratio for SSS
Given: 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱2,464
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 2,464
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = = = 28
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑝𝑝𝑝𝑝𝑟𝑟 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 88
The price-earnings ratio of SSS stock is 28 times per share.
b. Price-earnings ratio for GSIS
Given: 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ₱1,900
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑒𝑒 1,900
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = = = 25
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 76
The price-earnings ratio of GSIS stock is 25 times per share.
The price-earnings ratio is not a perfect guide to future market behavior of a stock. Occasionally a low price-
earnings ratio implies that the stock is undervalued in the market-in order words a good buy. At times a low
price-earnings ratio denotes that investors see a poor future for the company.
One more factor affecting the commission is whether the amount of shares purchased is a round lot (multiple
of 100 shares), or an odd lot (less than 100 shares). The commission rate on a round lot is generally a bit lower
than an odd lot.
Example 8: Shiela purchased 250 shares of AUS Inc. common stock at ₱3,500 per share. A few months later,
you sell the shares at ₱4,000. Her stockbroker charges 3% commission on round lots and 4% on odd lots.
Calculate the (a) total cost, (b) the proceeds, and (c) the gain or loss on the transaction.
Solution:
Given: Price per share = ₱3,500 Commission rate (round lots) =3%=0.03
Number of shares = 250 Commission rate (odd lots) =4%=0.04
a. Cost of purchasing stock
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑝𝑝𝑝𝑝𝑝𝑝 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎 × 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 3,500(250) = ₱875,000
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑟𝑟 ′ 𝑠𝑠 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑡𝑡𝑡𝑡
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑙𝑙𝑙𝑙𝑙𝑙 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 200 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 × 3,500 × 0.03 = ₱21,000
Bond Valuation
Bond valuation is a technique for determining the fair value of a particular bond.
Example 9: What is the current yield of a bond whose face value is ₱14,500 and pays a yearly interest of 12%
if purchased at face value at ₱13,920?
Solution:
When the price of bond is ₱14,500
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 . 12(14,500)
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 = = = 12%
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 14,500
The regular (periodic) interest payment from the bond will be:
𝐶𝐶𝐶𝐶𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑘𝑘 = 𝐹𝐹𝐹𝐹
The price of a bond is computed using the formula below:
1 − (1 + 𝑖𝑖)−𝑛𝑛
𝑃𝑃 = 𝑉𝑉(1 + 𝑖𝑖)−𝑛𝑛 + 𝑘𝑘 � �
𝑖𝑖
Example 10: A ₱3,200, at 9% bond pays coupons quarterly and will be redeemed on July 7, 2016. Find the
price if the bond is bought on July 7, 2012 to yield 8% compounded quarterly if the bond is redeemed at
par, (b) if the bond if redeemable at 110%.
Given:
𝑉𝑉 = ₱3,200 𝑗𝑗 = 8% 𝑜𝑜𝑜𝑜 .08 𝑡𝑡 = 4 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦
𝑚𝑚 = 4 𝑟𝑟 = 9% 𝑜𝑜𝑜𝑜 .09 𝑛𝑛 = 𝑡𝑡𝑡𝑡 = 4(4 = 16)
𝑟𝑟 0.09 𝑗𝑗 . 08
𝑏𝑏 = = = .0225 𝑖𝑖 = = = .02
𝑚𝑚 4 𝑚𝑚 4
1 − (1 + 𝑖𝑖)−𝑛𝑛
𝑃𝑃 = 𝑉𝑉(1 + 𝑖𝑖)−𝑛𝑛 + 𝑘𝑘 � �
𝑖𝑖
1 − (1 + .02)−16
𝑃𝑃 = 3,200(1 + .02)−16 + 72 � �
. 02
1 − (1.02)−16
𝑃𝑃 = 3,200(1.02)−16 + 72 � �
. 02
𝑃𝑃 = 3,200(0.7284458137) + 72(13.57770931)
𝑃𝑃 = 2,331.026604 + 977.5950706
𝑃𝑃 = ₱3,308.62
The price of the bond to yield 8% is ₱3,308.62.
REFERENCES:
Cordova, W., Gotauco, C., Ledesma, F., & Tabuloc, M.C. (2017). Mathematics of finance. Quezon City: Abiva
Publishing House, Inc.
Regacho, C., Benjamin, JB., & Oryan, S. (2017). Mathematics skills for life. Quezon City: Abiva Publishing
House, Inc.
Sirug, W. (2016). General mathematics. Manila: Mindshapers Co., Inc.