PRESENT VALUE is a financial calculation

that measures the worth of a future

amount of money or stream of
payments in today’s dollars adjusted for
interest and inflation.
In which: formula :
PV = Present Value PV = CF (1 + i)-n
I = Interest Rate OR
CF = Cash Flow PV = CF x [ 1 ÷ (1 + i)n ]
n = time/years
SIMPLE LOAN the lender provides the borrower
with an amount of funds (called the PRINCIPAL)
that must be repaid to the lender at the
MATURITY DATE along with an additional
payment of interest.

In which: formula :
PV = Present Value PV = CF (1 + i)-n
I = Interest Rate OR
CF = Cash Flow PV = CF x [ 1 ÷ (1 + i)n ]
n = time/years
Laura was given the option to receive Php100,000 by
the end of two years or be given Php100,000 now.
Assuming the interest rate is 8% per year and is
compounded annually, how do we calculate the
present value of the amount?

Using the first version of the formula, the solution is:

PV = CF (1 + i)-n
PV = Php100,000 (1 + 0.08)-2
PV = Php100,000 (1.08)-2
PV = Php100,000 (0.8573388)
PV = Php85,733.88
What is the present value of receiving a single
amount of Php5,000 at the end of three years if the
time value of money is 8% per year, compounded
quarterly?

Using the second version of the formula, the solution is:

PV = CF x [ 1 ÷ (1 + i)n ]
PV = Php5,000 x [ 1 ÷ (1 + 0.02)12 ]
PV = Php5,000 [ 1 ÷ (1.02)12 ]
PV = Php5,000 [ 1 ÷ (1.26824)]
PV = Php5,000 [ 0.78849 ]
PV = Php3,942.47
FIXED-PAYMENT LOAN – also called a fully
amortized loan, in which the lender provides
the borrower with an amount of funds which
must be repaid by making the same payment
every period, consisting of the part of the
principal and interest for a set number of years.
This type of credit market instrument is most
often used in auto and mortgage loans.
COUPON BOND – pays the owner of the bond a
fixed interest payment or a coupon payment every
year until the maturity date, when a specified final
amount (face value or par value) is repaid. The
coupon payment is so named because the
bondholder used to obtain payment by clipping a
coupon off the bond and sending it to the bond
issuer, who then sent the payment to the holder.
where: Formula :
C = yearly coupon payment C=F÷i
𝑪 𝑪 𝑪 𝑪 𝑭
F = face value of the bond 𝑷= + + (𝟏+𝒊)𝒏 + … + (𝟏+𝒊)𝒏
𝟏+𝒊 (𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏
i = coupon rate
Find the price of a 10% coupon bond with a
face value of Php1000, a 12.25% yield to
maturity, and eight years to maturity.
The formula to calculate the value of the yearly coupon payment is:
C=F÷i
C = Php1,000 ÷ 10%
C = Php100
𝑃ℎ𝑝100 𝑃ℎ𝑝100 𝑃ℎ𝑝100 𝑃ℎ𝑝100 𝑃ℎ𝑝1,000
𝑃= + 2
+ 3
+ … 10
+
1.1225 (1.1225) (1.1225) (1.1225) (1.1225)10
NOMINAL INTEREST RATE Ignore the effect of
inflation on the cost of borrowing. The interest rate
makes no allowance for inflation.
REAL INTEREST RATE the interest rate that is adjusted
by subtracting expected changes in the price level
(inflation) so that it more accurately reflects the true
cost of the borrowing.

Formula : Real Interest Rate = Nominal Interest Rate -

Inflation (Expected or Actual)
What is the real interest rate if the nominal
interest rate is 8% and the expected inflation
rate is 10% over the course of a year?
Where:
i = nominal interest rate = 0.08
π = expected inflation rate = 0.10

Solution :
𝑖𝑟 = 0.08 − 0.10 = −2%
RATE OF RETURN is the net gain or loss on an
investment over a specified time period,
expressed as a percentage of the investment’s
initial cost.
Formula : where in :

C+ Pt+1 − Pt
R= R = return from holding the bond from tine to time + 1
Pt
𝑐
= 𝑖𝑐 𝑃𝑡+1 = price of the bond year later
𝑃𝑡

𝑃𝑡+1 − 𝑃𝑡
=𝑔 𝑃𝑡 = price of the bond today
𝑃𝑡
What would the rate of return be on a bond
bought for $1,000 and sold one year later for
$800? The bond has a face value of $1,000 and a
coupon rate of 8%.
Solution :
C = $1000 ×0.08 = $80
𝑃𝑡+1 = $800
𝑃𝑡 = = $1,000
$80+($800−$1,000) −120
𝑅= = = −0.12 = −12%
$1,000 1,000
REINVESTMENT RISK occurs because the
proceeds from the short-term bond need to be
reinvested a future interest rate that is uncertain

INTEREST RATE RISK, OR MARKET RISK refers to

the chance that investments in bonds – also
known as fixed-income securities – will suffer as
the result of unexpected interest rate changes.