Hey guys! Welcome to your go-to guide for understanding the essential formulas you'll need in your Grade 12 PSEi (Philippine Stock Exchange Index) finances studies. We're going to break down each formula, explain what it means, and show you how to use it. Let's dive right in!

Understanding the PSEi

Before we jump into the formulas, let's make sure we're all on the same page about what the PSEi actually is. The Philippine Stock Exchange Index (PSEi) is essentially a benchmark of how well the Philippine stock market is doing. It's composed of the top 30 publicly listed companies in the country, selected based on specific criteria like market capitalization, liquidity, and public float. Think of it as a snapshot of the overall health of the Philippine economy, at least from a stock market perspective.

Why is the PSEi Important?

• Economic Indicator: The PSEi serves as a key economic indicator. A rising PSEi generally suggests a positive economic outlook, while a falling PSEi might indicate economic concerns.
• Investment Performance: It provides a benchmark for investors to measure the performance of their own portfolios. If your investments are outperforming the PSEi, you're generally doing well.
• Market Sentiment: The PSEi reflects the overall sentiment of investors. It can influence investment decisions and market behavior.

Factors Affecting the PSEi

Several factors can influence the PSEi, including:

• Economic News: Major economic announcements, such as GDP growth, inflation rates, and unemployment figures, can significantly impact the PSEi.
• Political Stability: Political events and government policies can create uncertainty or confidence in the market.
• Global Events: International events, such as global economic downturns or geopolitical tensions, can also affect the PSEi.
• Company Performance: The performance of the companies listed on the PSEi directly influences the index.

Key Formulas for PSEi Finances

Alright, now let's get to the meat of the matter – the formulas you need to know. These formulas will help you analyze and understand various aspects of the stock market and investment returns. Remember, understanding the why behind each formula is just as important as knowing the formula itself.

1. Simple Interest

Simple interest is a straightforward way to calculate the interest earned on an investment or the interest paid on a loan. It's based on the principal amount, the interest rate, and the time period.

• Formula: I = PRT
  • Where:
    • I = Simple Interest
    • P = Principal Amount
    • R = Interest Rate (as a decimal)
    • T = Time (in years)

Example: Suppose you invest PHP 10,000 in a bond that pays a simple interest rate of 5% per year for 3 years. The simple interest earned would be:

• I = 10,000 * 0.05 * 3 = PHP 1,500

So, after 3 years, you would have earned PHP 1,500 in simple interest.

2. Compound Interest

Compound interest is where things get a bit more exciting. It's interest calculated on the initial principal and also on the accumulated interest from previous periods. This means your money grows faster over time.

• Formula: A = P(1 + r/n)^(nt)
  • Where:
    • A = Amount of money accumulated after n years, including interest.
    • P = Principal amount (the initial amount of money)
    • r = Annual interest rate (as a decimal)
    • n = Number of times that interest is compounded per year
    • t = Number of years the money is invested or borrowed for

Example: Let's say you invest PHP 10,000 in an account that pays an annual interest rate of 5% compounded quarterly (n = 4) for 3 years. The amount you would have after 3 years is:

• A = 10,000(1 + 0.05/4)^(43)*
• A = 10,000(1 + 0.0125)^(12)
• A = 10,000(1.0125)^(12)
• A ≈ PHP 11,607.55

So, after 3 years, you would have approximately PHP 11,607.55. Notice how this is more than the simple interest example.

3. Future Value of an Ordinary Annuity

An annuity is a series of equal payments made at regular intervals. The future value of an ordinary annuity calculates the value of these payments at a future date, considering compound interest.

• Formula: FV = P * [((1 + r)^n - 1) / r]
  • Where:
    • FV = Future Value of the annuity
    • P = Payment amount per period
    • r = Interest rate per period
    • n = Number of periods

Example: Suppose you deposit PHP 1,000 into an account at the end of each year for 5 years. The account pays an annual interest rate of 6%. The future value of this annuity would be:

• FV = 1,000 * [((1 + 0.06)^5 - 1) / 0.06]
• FV = 1,000 * [(1.3382 - 1) / 0.06]
• FV = 1,000 * [0.3382 / 0.06]
• FV ≈ PHP 5,637.10

After 5 years, the future value of your annuity would be approximately PHP 5,637.10.

4. Present Value of an Ordinary Annuity

The present value of an ordinary annuity is the current value of a series of future payments, discounted back to the present using an interest rate. This helps you determine how much a stream of future payments is worth today.

• Formula: PV = P * [(1 - (1 + r)^-n) / r]
  • Where:
    • PV = Present Value of the annuity
    • P = Payment amount per period
    • r = Interest rate per period
    • n = Number of periods

Example: What is the present value of receiving PHP 2,000 per year for the next 3 years, assuming an annual discount rate of 8%?

• PV = 2,000 * [(1 - (1 + 0.08)^-3) / 0.08]
• PV = 2,000 * [(1 - (1.08)^-3) / 0.08]
• PV = 2,000 * [(1 - 0.7938) / 0.08]
• PV = 2,000 * [0.2062 / 0.08]
• PV ≈ PHP 5,155

The present value of receiving PHP 2,000 per year for the next 3 years is approximately PHP 5,155.

5. Stock Valuation (Dividend Discount Model)

The Dividend Discount Model (DDM) is a method of valuing a stock based on the present value of its expected future dividends. It's based on the idea that the value of a stock is the sum of all its future dividend payments, discounted back to the present.

• Formula: P0 = D1 / (r - g)
  • Where:
    • P0 = Current stock price
    • D1 = Expected dividend per share next year
    • r = Required rate of return (discount rate)
    • g = Constant growth rate of dividends

Example: Suppose a company is expected to pay a dividend of PHP 2.00 per share next year. Investors require a rate of return of 10%, and the dividends are expected to grow at a constant rate of 5% per year. The current stock price would be:

• P0 = 2.00 / (0.10 - 0.05)
• P0 = 2.00 / 0.05
• P0 = PHP 40.00

The estimated current stock price is PHP 40.00.

6. Return on Investment (ROI)

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. It directly measures the amount of return on a particular investment, relative to the investment’s cost.

• Formula: ROI = (Net Profit / Cost of Investment) * 100

  • Where:
    • ROI = Return on Investment
    • Net Profit = The profit generated from the investment (Revenue - Costs)
    • Cost of Investment = The total cost of the investment.

Example: Suppose you invested PHP 50,000 in a stock. After a year, you sold the stock for PHP 60,000. Calculate the ROI.

• Net Profit = PHP 60,000 (Revenue) - PHP 50,000 (Cost) = PHP 10,000
• ROI = (PHP 10,000 / PHP 50,000) * 100
• ROI = 0.20 * 100
• ROI = 20%

The Return on Investment (ROI) is 20%.

Tips for Using These Formulas

• Understand the Context: Don't just memorize the formulas. Understand what each variable represents and how the formula applies to real-world situations.
• Practice, Practice, Practice: The more you practice using these formulas, the more comfortable you'll become with them. Work through examples and try applying them to different scenarios.
• Use a Financial Calculator: Financial calculators can be incredibly helpful for complex calculations, especially those involving compound interest and annuities.
• Double-Check Your Work: Always double-check your calculations to avoid errors. Even a small mistake can significantly impact the results.
• Consult with Professionals: If you're unsure about anything, don't hesitate to ask for help from a teacher, financial advisor, or other qualified professional.

Conclusion

Mastering these formulas is a crucial step in understanding PSEi finances and making informed investment decisions. By understanding the principles behind each formula and practicing their application, you'll be well-equipped to analyze the stock market, evaluate investment opportunities, and manage your finances effectively. Keep practicing, stay curious, and good luck with your financial journey!