Chapter 2 Compound Interest 1 2

Chapter 2
COMPOUND INTEREST
COMPOUND INTEREST
An interest is said to be
compounded or converted when it
(the interest) is added to the principal
at regular intervals, and the sum
becomes the new principal.
• Interest may be compounded:
annually - once a year

semi-annually - twice a year
quarterly - four times a year
monthly - twelve times a year
• The final amount (the sum of the
interest and the principal ) is called the
compound amount.
• The difference between the compound

amount and the principal is called the
compound interest.
Example:
Find the compound amount
and interest if P1,000 is invested at
an interest rate of 9% compounded
annually for 3 years.
*the term “compounded annually means that the
interest earned in 1 year is added to the principal to
earn additional interest for the next year.
If the investment term is long,
the computation of the compound
amount would be very lengthy and
tedious. For that reason, formulas
have been derived to shorten the
process.
The Compound Amount
Formula
n
F  P (1  i )
where:
P = original principal
F = compound amount or accumulated value of P at the
end of n periods
i = interest rate per period,{ i = j/m}
j = nominal rate of the interest (annual rate)
m = frequency of conversion
n = total number of conversion periods in the
investment term, { n = mt }
t = term of investment in years
Example:
Find the compound amount
and interest if P1,000 is invested at
an interest rate of 9% compounded
annually for 3 years.
n
Solution: F  P (1  i )
F = 1000 (1 + 0.09)3
F = 1000 (1.09)3
F = 1,295.03
Therefore the compound amount is P 1,295.03
The Compound Amount (F)
n
F  P (1  i )
Where:
j n  mt
i and
m
Therefore:
mt
 j
F  P 1  
 m
Examples
1. Find the compound amount if
P23,000 is invested for 4 years at
the rate of 12% compounded:
n
a. annually F  P (1  i )
b. semi – annually j
mt

c. quarterly F  P1  m 
 
ACTIVITY NO. 1
2. Accumulate P15,500 for 17 months at
12.6% compounded monthly. Also,
compute the compound interest.
3. Regina bought a designer bag on terms.
She made a down payment of P100,000
and the remaining balance to be paid 1
year after at 8.24% converted quarterly.
How much did she pay after 1 year if the
bag’s cash price was P150,000?
The values of m
(frequency of conversion)
annually once a year m=1
semi-annually twice a year m=2
quarterly four times a m=3

year
monthly twelve times a m=4
year
The Present Value (P) at
Compound Interest
From the formula:
n
F  P (1  i )
The present value P is:
F n
P n
or P  F(1  i )
(1  i )
Activity 1..Continuation
4. Find the present value of P1,200
due in 3 ½ years if money is invested
at 12% compounded monthly.
5. Discount P35,700 for 2 years and 3

months at 8.4% compounded
quarterly.
6. If P3,000 was due on December 5,
2009, find its present value on June
5, 2007, if money was invested at
10% compounded semi-annually.
7. A computer was bought on installment:
P65,000 down payment and the balance
of P45,000 in 15 months. What was its
cash price if the interest rate was 14%
compounded quarterly? How much
would have been saved if the computer
was bought in cash?
8. A man purchased a piece of lot by
making an initial partial payment of
P600,000 and another payment
amounting to P400,000 one year later.
How much would have he paid if he
bought that lot in cash? Interest for
payment by installment was at 20%
compounded semi-annually.
*Compound Amount and Present
Value at a Fraction of a Period
When n is a fraction, we will

still use the same formulas as we
will assume compound interest
throughout the term.
*Compound Amount and Present
Value at a Fraction of a Period
Activity 2:
1. Find the compound amount if P10,300 is
invested for 2 years and 10 months at 11%
compounded semi-annually.
2. Discount P32,000 for 3 years and 7 months

at 10% compounded quarterly.
Finding the Interest Rate (j)
n
In the formulaF  P (1  i )
, the interest rate can be
determined if F, P, and n are
known.
The formula for interest rate (j) is:
 1
  
 F  n
j  m    1
 P  
 
P = original principal
F = compound amount or accumulated value of P
at the end of n periods
I = interest rate per period,
j = nominal rate of the interest (annual rate)
m = frequency of conversion
n = total number of conversion periods in the
investment term,
t = term of investment in years
Activity 2 (continuation)
3. At what nominal rate compounded
quarterly will P7,500 amount to P8,100 in
1 year and 9 months?
4. What nominal rate converted semi-
annually will make P29,700 amount to
P50,000 in 7 years and 6 months?
5. If P25,000 earned an interest of P3,000
in 2 years, at what rate compounded
annually was the money invested?

Chapter 2 Compound Interest 1 2

Uploaded by

Copyright:

Available Formats

Chapter 2 Compound Interest 1 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 2 Compound Interest 1 2

Uploaded by

Copyright:

Available Formats

Chapter 2

annually - once a year

• The difference between the compound

semi-annually twice a year m=2

quarterly four times a m=3

5. Discount P35,700 for 2 years and 3

When n is a fraction, we will

2. Discount P32,000 for 3 years and 7 months

You might also like