CHAPTER 6

INTEREST RATES
CALCULATING INTEREST
RATES
 SIMPLE INTEREST
Mr. Kobe Bryant borrowed 10,000php from Michael Jordan at the simple interest
rate of 10 percent per year, and is due for repayment in three years. How much does
Mr. Kobe Bryant owe Michael Jordan on repayment date?

10% PER YEAR

FORMULA
Total amount due = Principal + Interest
Interest = rate x principal x number of years

SOLUTION
Total amount due = 10,000 + (10% x 10,000 x 3)
= P10,000 + 3,000
= P13,000
COMPOUND INTEREST
If Mr. Chris Evans borrowed 10,000php from Tony Stark at the interest
rate of 10 percent compound annually, and which is due for repayment
in three years, how much money must Mr. Chris Evans hand out to Mr.
Tony Stark at the repayment date?

10%
COMPOUND ANNUALLY
 FORMULA
TAD = 𝑷 𝟏 + 𝒓 𝒏

Where:
TAD = total amount due
P = principal
r = rate of interest
n = number of years (compounding period)

SOLUTION
𝑻𝑨𝑫 = 𝟏𝟎, 𝟎𝟎𝟎 𝟏+. 𝟏𝟎 𝟑

= 13,310
 YIELD TO MATURITY (YTM)
Mr Ben Maddumba paid P9,000 for a P10,000 face value, 10 percent
coupon bond that will mature in 10 years and which he expects to
hold until maturity. What annual interest rate will Mr. Maddumba be
getting on the security considering that interest payments are made
twice a year?

FORMULA
𝟏 + 𝑭 − 𝑷 /𝒏
𝒀𝑻𝑴 =
(𝑭 + 𝑷)/𝟐
Where:
YTM = yield to maturity (or annual interest rate)
P = price of bond at time 0 N = number of years to maturity
I = annual interest payments
F = face value of the bond, payable at maturity
COMPUTATION OF YTM
𝟏, 𝟎𝟎𝟎 + (𝟏𝟎, 𝟎𝟎𝟎 − 𝟗, 𝟎𝟎𝟎)/𝟏𝟎
𝒀𝑻𝑴 =
𝟏𝟎, 𝟎𝟎𝟎 + 𝟗, 𝟎𝟎𝟎 /𝟐

𝟏𝟎𝟎𝟎
𝟏, 𝟎𝟎𝟎 + ( )
= 𝟏𝟎
𝟏𝟗, 𝟎𝟎𝟎/𝟐
= 11.57%
CURRENT YIELD
A 10,000 face value bond with maturity of 10 years, promie
to pay 1000 interest per year. If it were to sell at a market
price of 9,000 what is the current yield of the bond?

FORMULA
𝒑𝒓𝒐𝒎𝒊𝒔𝒆𝒅 𝒂𝒏𝒏𝒖𝒂𝒍 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒑𝒂𝒚𝒎𝒆𝒏𝒕
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒊𝒆𝒍𝒅 =
𝒎𝒂𝒓𝒌𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒓 𝒃𝒐𝒏𝒅

SOLUTION 𝟏, 𝟎𝟎𝟎
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒊𝒆𝒍𝒅 =
𝟗, 𝟎𝟎𝟎
= 9% current yield
PRODUCTION OPPORTUNITIES

INTEREST
BORROWED FUNDS
TIME PREFERENCES FOR
CONSUMPTION
RISK
INFLATION