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DLSUD-SHS

General Mathematics

THE CONCEPT OF

COMPOUND

INTEREST

is the procedure

in which interest is

periodically

calculated

and added to the

principal.

1. COMPOUND INTEREST ( I )

This is an interest resulting from the periodic

addition of simple interest to the principal

amount

2. COMPOUND AMOUNT ( A )

This is an accumulated amount composed

of the principal and the compound interest.

Recall that in SIMPLE INTEREST

for a given principal amount P,

for a time period of t years,

and interest rate r

the accumulated value / future value

of P is given by:

A = P(1 + rt)

Present worth of Future Value of Principal Amount

Period Principal Amount (F)

(P)

1 P P(1+i)

2 P(1+i) P(1+i)*(1+i) = P(1+i)2

3 P(1+i)2 P(1+i)2*(1+i) = P(1+i)3

4 P(1+i)3 P(1+i)3 *(1+i) = P(1+i)4

. . .

. . .

. . .

n P(1+i) n-1 P(1+i)n-1 *(1+i) = P(1+i)n

Formulas: A = P(1+i)n

I=A-P

3. COMPOUNDING/CONVERSION PERIOD (m)

is the number of times in a year the interest will be

compounded.

PERIOD COMPOUNDINGS YEAR

PER YEAR (m)

Annual 1 1 year

Semiannual 2 6 months

Quarterly 4 3 months

Bimonthly 6 2 months

Monthly 12 1 month

CONVERSION PERIOD

The interest earned during a period is

“converted” to principal at the end of the

period and becomes the new principal for the

succeeding period.

PERIODS ( n )

n = t*m,

t = term of the loan or investment in years

m = conversion period

4. ANNUAL INTEREST RATE ( r )

is the interest on which the stated compound

interest is based.

is the rate of interest earned in one conversion

period.

i= r/m

Note:

If the conversion period is not indicated in the

problem, assume that the conversion period is

annual or m=1.

Example #1: COMPOUND AMOUNT (A)

18% compounded quarterly. How much should he

pay to the creditor after 4 years to pay off his debt?

Example #2: COMPOUND AMOUNT (A)

Php29,300 compounded bimonthly at 12%. How

much is his money now?

Example:

Accumulate ₱24300 for 7 years and 6

months at 12% compounded

1. annually

2. semiannually

3. quarterly

4. every 2 months

Examples:

1. Find the compound amount and interest

on Php360,000 for 8 years and 6 months

at 10% compounded semiannually.

at 12% compounded quarterly for 4 years

and 3 months.

6. PRESENT VALUE ( P )

of the investment is the principal which, if

invested for a given time t and a given

interest rate r, will accumulate on its

maturity date.

A n

P or P A( 1 i )

(1 i ) n

Example #1: PRINCIPAL (P)

compounded monthly in order to accumulate

Php13,740 in 3 years?

Example #2: PRINCIPAL (P)

combined principal and the interest on an amount

that he borrowed 24 months ago at 14%

compounded semiannually, is now Php60,000. How

much of this amount is principal?

Example #1: COMPOUND INTEREST (I)

years at 11% compounded quarterly.

Example #2: COMPOUND INTEREST (I)

semiannually, find the compound interest in 3 years.

Compound Nominal /Annual Rate (r)

A

r m n 1

P

Examples:

1. If ₱20000 will accumulate to ₱45758.55

in 14 years, what is the interest rate

compounded bimonthly?

quarterly for 8 years will ₱40000 accumulate

to ₱95296.86?

Term (t)

A

log

t P

mlog( 1 i )

Examples:

1. How long would it take for ₱10600 to

mature into ₱15000 if 16% interest is

computed semiannually?

of ₱10000 is invested at 10% compounded

quarterly?

Exercises:

1. Accumulate ₱3500 for 6 years and 9 months at 8%

converted semiannualy.

compounded quarterly, what is its present value?

compounded semiannualy?

settle his debt after 2 years and 3 months. At what rate

converted monthly is he paying the interest?

Exercises:

5. On the birth of a son, a father wishes to invest sufficient

money in a fund to accumulate to ₱100000 by the time his

son turns 21 years old. How much should he place in the

fund that offers an interest rate of 12% compounded

semiannually?

6.6% converted every 2 months. How long will it take her

money to earn an interest of ₱25000?

her parents. If she invests this money in a bank that gives

8% interest rate converted annually, how much money will

she have on her 25th birthday?

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