FINANCE ANSWER KEY

1.compute the interest earned over the 5 year term with PHP500,000 as principal
using the following compounding periods.
Quarterly:
Monthly:
Semi-monthly:
Daily (365 days):

2. a. Mr. Lopez wishes to find the effective annual rate for his loan in BOD bank with a 5% nominal annual
rate when interest is compounded (1) annually, (2) semi-annually, and (3) quarterly.

b. Ask the learners to compute for the EAR for the following:
For monthly compounding:
For daily compounding:

3. Lola Clara became a very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.

4.Ask the learners to compute for what amount they will receive (what is the future value) if PHP150,000 is
invested at 6% per annum compounded semi-annually for 3 years..

5. 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?

6. 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?

7.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?

8. Mr. Mendoza wishes to determine how much the value of his savings in 5 years will be if he will put PHP1,000
per year in a bank which provides 7% interest per annum.

9. Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option of paying it today for PHP10,500 or
buying them in instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in
two equal payments of PHP4,000 each for the next two years. Given an interest rate of 10%, which is the better
option?

10. You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your
deposit?

11. You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find
the present value)
12. FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the
higher effective annual rate?

13. Compute the present value and future value of PHP100 cash flow for the following combination of discount
rates and times:
a. r = 8%, t = 5 years

b. r = 8%, t = 10years
c. r = 5%, t = 5years
d. r = 5%, t = 10 years

14. You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you
accumulate in your account after 10 years? What if the bank pays compound interest?

15. Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from
now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net of taxes every year and
this amount is compounded annually, how much does he need to invest today? What if the interest is compounded
semi-annually, how much does he need to invest today?

16. What is the present value of the following cash flow stream if the interest is 6%?

17. What is the present value of a 3-year annuity of PHP100 if the discount rate is 6%?

18. What is the present value of a 5-year annuity payment of PHP1,000 with a discount rate of 5% if the first
payment will be made today?

19. Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront.

He, however, has the following options:

Get 8.1 million upfront
Receive 1 million every year for 10 years
Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?

20. period: 6 semi-annual periods (3 years)

Effective interest: 12%
Stated rate: 10%
Face Value: 100,000
Issue Price: 95,082.68

21. Period: 6 semi-annual periods (3 years)

Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14

22. 1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%. How much
is the issue price?
23. You have a one year PHP1,000 bond with a coupon rate of 5% and was offered at an effective rate
of 6%. How much is the issue price?

24. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was offered at an
effective rate of 5%. How much should he pay upfront? (Issue price)

25. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8% maturing in 4 years.
The interest is paid annually, and the market interest rate at the date of issue was 11%. What is the
issue price of the bond? Prepare the 4 year amortization schedule for the bond.

Issue price: PHP2,720,779.89

Principal 1,976,192.92
Interest 744,586.97
2,720,779.89

26. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The bonds pay
interest semi-annually. The market rate of interest as of the date of issuance is 10%. What is the
issue price of the bond? Prepare the 5 year amortization schedule for the bond.

Issue price: PHP4,308,869.40

Principal 2,455,653.01
Interest 1,853,216.39
4,308,869.40

27. A. Given the cash flows above and a discount rate of 5%, compute the payback period and NPV of
Project Pizza.

B. If PHP50,000 is earned on the 3rd year of the project, what is the new NPV of the project? What is
the payback period?

28.

a. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both
projects.

B. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that
the discount rate remains at 11%? (Which has the higher NPV)

C. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)

d. What is the payback period for each project?

29. You are the investment manager of an appliance company. The industry is currently in the expansion
face and the CEO would like to capture as much of the market share as possible. You asked your
analysts to submit project proposals as summarized below.

Which projects should the manager choose? If you were given unlimited capital, which projects should be
implemented?

30.

31.

Sample Essay Questions

1. Why would a risk-taker (likes to take risks) type of investor prefer equities over fixed income?

2. Why would a risk-averse (likes to avoid risks) type of investor prefer fixed income over equities?

3. How do mutual funds differ from UITFs?

4. If lets say you have PHP1,000,000 today which you can invest for the next 10 years, where will you
put it and why?