BEA L, BANDAL
ABM122-04
Maam Angelene Cruz Rafael
Business Finance
Activity 1
Directions: Answer the following set of questions
1. What types of investments would your purchase to reduce your exposure to risks?
To reduce exposure to risks, it is advisable to diversify your investment portfolio. Diversification involves
spreading your investments across different asset classes and sectors
Stocks: Investing in a diversified portfolio of stocks can help reduce risk. You can consider investing in a
mix of large-cap, mid-cap, and small-cap stocks across different industries and sectors.
Bonds: Bonds are considered less risky than stocks and can provide stable income. Investing in a mix of
government bonds, corporate bonds, and municipal bonds with varying maturities can help reduce
overall risk.
Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of
stocks, bonds, or other assets. By investing in mutual funds, you can benefit from professional
management and diversification across multiple securities
2. Define investments from the perspective of finance
In finance, investments refer to the allocation of funds or capital into various assets or financial
instruments with the expectation of generating income or achieving a financial return over time.
Investments involve the purchase or acquisition of assets with the goal of generating wealth, preserving
capital, or achieving specific financial objectives
3. Give examples of financial instruments.
Financial instruments refer to tradable assets or contracts that represent a monetary value. These
instruments are used by individuals, companies, and institutions for investment, hedging, or speculative
purposes. Here are some examples of common financial instruments:
Stocks: Represent ownership shares in a company, giving the holder a claim on the company's assets
and earnings.
Bonds: Fixed-income securities that represent a loan made by an investor to a government or
corporation in exchange for regular interest payments and the return of the principal amount at
maturity.
Mutual Funds: Pooled investment vehicles that collect money from multiple investors to invest in a
diversified portfolio of stocks, bonds, or other securities.
Exchange-Traded Funds (ETFs): Similar to mutual funds, ETFs are investment funds that trade on stock
exchanges, providing investors with exposure to a basket of assets like stocks, bonds, or commodities.
Options: Derivative contracts that give the holder the right, but not the obligation, to buy or sell an
underlying asset (such as stocks) at a predetermined price within a specified time period.
Futures: Contracts that obligate the buyer to purchase or the seller to sell an underlying asset (such as
commodities, currencies, or financial instruments) at a future date and a predetermined price.
Swaps: Financial agreements between two parties to exchange future cash flows based on specified
terms. Common types include interest rate swaps, currency swaps, and commodity swaps.
Foreign Exchange (Forex): The market for trading currencies, where participants buy and sell different
currencies based on their expectations of exchange rate movements.
Derivatives: Financial contracts whose value derives from an underlying asset or benchmark. Examples
include futures, options, swaps, and forward contracts.
Certificates of Deposit (CDs): Time deposits offered by banks, with a fixed interest rate and maturity
date. Investors deposit a specific amount for a specified period and receive interest payments until
maturity.
Treasury Bills, Notes, and Bonds: Debt securities issued by governments to finance their operations.
These instruments have varying maturities and are considered relatively low-risk investments.
Commodities: Tradable goods or raw materials such as gold, silver, oil, natural gas, agricultural products,
or metals that are bought and sold on commodity exchanges.
These are just a few examples of financial instruments available in the market. Each instrument has its
own characteristics, risk profiles, and potential returns, and investors should carefully evaluate their
investment goals and risk tolerance before choosing suitable financial instruments.
Activity no. 2
1. Is it safer to invest in stocks than bonds? Why or why not?
The safety of investing in stocks versus bonds depends on various factors and individual circumstances.
2. What is the difference between investing and gambling?
The safety of investing in stocks versus bonds depends on various factors and individual circumstances.
3. Differentiate common stocks and preferred stocks.
Common Stocks and Preferred Stocks are two types of equity securities issued by companies, but they
have distinct characteristics and rights.
Activity no. 3
1. Explain the phrase “Your Income level has a role to play in saving”
In general, saving is a positive function of income – the greater the income the greater the likelihood of
saving. With this also, the income level has a role to play in saving because it will be a challenge on how
it will be spent or being saved.
2. People use different strategies in managing their money. Explain
People use different strategies in managing their money for several reasons, as financial
management is highly subjective and depends on individual circumstances, goals, risk
tolerance, and personal preferences.
3. What do need to feel financially safe enough to at least breathe without hyperventilating?
Emergency Fund: Having an adequate emergency fund is crucial for financial security. This fund should
cover three to six months' worth of essential living expenses, including housing, utilities, food, and
healthcare. Having this cushion provides a sense of stability and protection against unexpected expenses
or income disruptions.
Debt Management: Managing debt is an important aspect of feeling financially secure. Keeping debt at
manageable levels and having a plan to pay it off over time can alleviate stress and improve financial
well-being. This includes monitoring credit card balances, paying bills on time, and avoiding high-interest
debts.
Stable Income: A stable and reliable source of income is essential for financial security. Whether it's
through a steady job, business income, or investment returns, having a consistent stream of income
provides a sense of stability and reduces financial anxiety.
Budgeting and Financial Planning: Creating and following a budget allows individuals to track their
income and expenses, ensuring they have control over their finances. Developing a financial plan that
aligns with one's goals and values can provide a roadmap for achieving financial security and peace of
mind.
Activity no. 4
As a student, what are the tips that you can suggest to manage personal finances? Share your
experience in handling your finances.
Create a Budget: Start by creating a budget to my income and expenses. List your sources of income
(part-time job, allowances) and categorize your expenses (e rent, groceries, transportation). Be realistic
and prioritize essential expenses while leaving room for savings and leisure activities.
Activity no. 5
1. Explain the time value of money.
The time value of money is a fundamental concept in finance that recognizes the principle that money
has different values at different points in time. It suggests that a dollar received today is worth more
than the same dollar received in the future. This is because money has the potential to earn returns over
time, either through interest, investments, or other income-generating opportunities.
2. Differentiate present value of single amount and annuity.
The present value of a single amount and the present value of an annuity are two concepts used in
finance to assess the value of cash flows at different points in time.
Present Value of a Single Amount: The present value of a single amount refers to the current value of a
future cash flow or a lump sum that will be received or paid at a specific future date. It calculates the
amount of money needed today to match the future value of that cash flow, considering the time value
of money. The present value takes into account factors such as interest rates, time periods, and the
opportunity cost of capital. It is used to determine the fair value of a single cash inflow or outflow
occurring at a specific future date.
Present Value of an Annuity: An annuity refers to a series of equal periodic cash flows received or paid
over a specific period of time. The present value of an annuity is the current value of the entire series of
future cash flows, discounted back to the present at an appropriate interest rate. The present value of
an annuity considers the timing and amount of each cash flow, the discount rate, and the total number
of periods. It helps determine the worth of a stream of regular cash flows, such as monthly rent
payments, loan repayments, or an income stream from an investment or pension plan.
3. State the formula to compute Interest rate, future value, pre
Interest Rate (I): The formula to compute interest rate is: I = (FV / PV)^(1/t) - 1
Where: I = Interest Rate FV = Future Value PV = Present Value t = Time period (in years)
Future Value (FV): The formula to compute future value is: FV = PV * (1 + r)^t
Where: FV = Future Value PV = Present Value r = Interest Rate t = Time period (in years)
Present Value (PV): The formula to compute present value is: PV = FV / (1 + r)^t
Where: PV = Present Value FV = Future Value r = Interest Rate t = Time period (in years)
Periodic Payment (PMT): The formula to compute periodic payment is: PMT = PV * r / (1 - (1 + r)^(-n))
Where: PMT = Periodic Payment PV = Present Value r = Interest Rate n = Number of periods
4. sent value, future value of annuity, and present value of annuity.
Present Value (PV) of a Single Amount: The formula to compute the present value of a single amount is:
PV = FV / (1 + r)^n
Where: PV = Present Value FV = Future Value r = Interest Rate n = Number of periods
Future Value (FV) of an Annuity: The formula to compute the future value of an annuity is: FV = PMT *
((1 + r)^n - 1) / r
Where: FV = Future Value of the annuity PMT = Periodic Payment r = Interest Rate n = Number of
periods
Present Value (PV) of an Annuity: The formula to compute the present value of an annuity is: PV = PMT *
(1 - (1 + r)^(-n)) / r
Where: PV = Present Value of the annuity PMT = Periodic Payment r = Interest Rate n = Number of
periods
Activity no. 6
Summarize the lesson for 4th quarter.
In the fourth quarter of the business finance lessons, the focus was on various important concepts and
principles related to financial management.
Financial Analysis: The importance of financial analysis in evaluating the financial health of a business.
This includes analyzing financial statements, assessing financial ratios, and interpreting the results to
gain insights into the company's performance.
Capital Budgeting: The process of evaluating and selecting long-term investment projects. It involves
estimating cash flows, considering the time value of money, and applying techniques such as net
present value (NPV), internal rate of return (IRR), and payback period to determine the profitability and
feasibility of investment opportunities.
Cost of Capital: Understanding the cost of capital, which is the rate of return required by investors to
provide funding to a company. It includes the cost of debt, cost of equity, and weighted average cost of
capital (WACC). Determining the cost of capital helps in making investment decisions and assessing the
financial viability of projects.
Capital Structure: Examining the mix of debt and equity financing used by a company to finance its
operations. Finding the optimal capital structure involves considering factors such as risk, cost of capital,
and financial flexibility to maximize shareholder value and minimize the cost of capital.
Dividend Policy: Understanding the various dividend policies companies can adopt, such as paying
dividends, reinvesting earnings, or repurchasing shares. Analyzing dividend policy involves considering
factors such as profitability, cash flow availability, growth opportunities, and shareholder expectations.
Risk Management: Recognizing the importance of risk management in business finance. This includes
identifying, assessing, and mitigating financial risks such as market risk, credit risk, operational risk, and
liquidity risk. Risk management strategies help protect the company's financial stability and ensure the
achievement of its objectives.
International Finance: Exploring the challenges and opportunities of conducting business in the global
marketplace. This includes understanding foreign exchange rates, managing currency risk, evaluating
international investment opportunities, and considering the impact of international economic factors on
business finance.
Overall, the lesson on business finance in the 4th quarter focuses on equipping individuals with the
knowledge and tools to make sound financial decisions, evaluate investment opportunities, and manage
financial risks effectively. Understanding these concepts is crucial for business success and ensuring the
long-term financial sustainability of an organization.