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COMPOUND INTEREST

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


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.

CONVERSION NO. OF COMPOUNDING PER


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.

The TOTAL NUMBER OF CONVERSION


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.

5. PERIODIC INTEREST RATE ( i )


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)

Virgilio Secundo borrows Php4,800 with interest at


18% compounded quarterly. How much should he
pay to the creditor after 4 years to pay off his debt?
Example #2: COMPOUND AMOUNT (A)

Two years ago, Sostenes Cabaruan invested


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.

2. Find the amount due if ₱6800 is invested


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)

How much should be deposited now at 18%


compounded monthly in order to accumulate
Php13,740 in 3 years?
Example #2: PRINCIPAL (P)

Crispin Secundo has just been notified that the


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)

Find the interest charged on a loan of Php7,000 for 4


years at 11% compounded quarterly.
Example #2: COMPOUND INTEREST (I)

If Php19,000 is invested at 18% compounded


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?

2. At what nominal rate compounded


quarterly for 8 years will ₱40000 accumulate
to ₱95296.86?
Term (t)

 A
log  
t  P
mlog( 1  i )
Examples:
1. How long would it take for ₱10600 to
mature into ₱15000 if 16% interest is
computed semiannually?

2. When is ₱13200 due if its present value


of ₱10000 is invested at 10% compounded
quarterly?
Exercises:
1. Accumulate ₱3500 for 6 years and 9 months at 8%
converted semiannualy.

2. If ₱5000 is due in 4 years and 3 months at 18%


compounded quarterly, what is its present value?

3. In how many years will a principal triple itself at 10%


compounded semiannualy?

4. A debtor borrows ₱35000 and agrees to pay ₱42000 to


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. Lilian deposited ₱50000 in a bank that pays interest at


6.6% converted every 2 months. How long will it take her
money to earn an interest of ₱25000?

7. On her 18th birthday, Janet receives ₱20000 as gift from


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?