Formula For Future Worth Compound Interest

COMPOUND INTEREST
Compound Interest = the interest for an interest period is calculated on the principal plus total
amount of interest accumulated in previous periods.
= “interest on top of interest”
Interest Principal at Beginning Interest earned Amount at end of period

Period of period during period
1 P Pi P + Pi = P(1 + i)
2 P (1 + i) P ( 1+i)i P(1+ i) + P(1+i)i = P(1+i)(1+i) =
P(1+i)2
3 P ( 1 + i)2 P (1+i)2i P ( 1 + i)2 + P (1+i)2i = P(1+i)3
n P ( 1 + i)n-1 P (1+i)n-1 i P(1+i)n
Formula for future worth compound interest
Where: = “single payment compound amount factor”
Formula for single payment present worth factor
Where: = “single payment present worth factor”
P – present worth
F – compound amount at the end of “n” periods
i – rate of interest ( ordinary interest divided by m)
n – number of conversion period
RATE OF INTEREST
A. NOMINAL RATE OF INTEREST
The nominal interest specifies the rate of interest and a number of interest periods in one
year.
where
i = rate of interest per interest period
r = nominal interest rate
m = number of compounding periods per year
ILLUSTRATIVE EXAMPLES
B. EFFECTIVE RATE OF INTEREST

• Effective rate of interest is the actual or exact rate of interest on the principal during one
year.
• The only interest rate that should be used in equivalence
• If the nominal interest is 10% compounded quarterly, then the effective interest will be
CASH FLOW DIAGRAM
• Is a graphical representation of cash flows drawn on a time scale.

• It is a means of visualizing(Simplifying) the flow of receipts and disbursements
Illustrative Examples
1. Find the nominal rate which is converted quarterly could be used instead of 12%
compounded monthly. What is the corresponding effective rate?
2. Find the amount at the end of two years and seven months if P1000 is invested at 8%
compounded quarterly using simple interest for anytime less than a year interest period.
Ans. F = 1,226.34
3. Find the present worth of a future payment of P300,000 to be made in 5 years with an
interest rate of 8% per annum. Ans.P204,174.96
4. Find the present worth of a future payment of P100,000 to be made in 10 years with an
interest of 12% compounded quarterly. Ans. P30,655.68
5. In how many years is required for P2,000 to increase by P3,000 if interest at 12%
compounded semi-annually? Ans. 7.86 years
6. John borrowed P50,000.00 from the bank at 25% compounded semi-annually. What is
the equivalent effective rate of interest? Ans. 26.56%
7. A sum of P1,000.00 is invested now and left for eight years, at which time the principal is
withdrawn. The interest has accrued is left for another eight years. If the effective annual
interest rate is 5%, what will be the withdrawal amount at the end of the 16th year? Ans.
P705.42
EQUATION OF VALUE
• obtained by setting the sum of the values on a certain comparison or focal date of one set
of obligations equal to the sum of the values on the same date of another set of
obligations.
Illustrative Examples:
1. A man bought a lot worth P1,000,000 if paid in cash. On the installment basis, he paid a
down payment of P200,000; P300,000 at the end of one year; P400,000 at the end of
three years and a final payment at the end of five years. What was the final payment if
interest was 20%. Ans. P792,576
2. A student deposits P1,500 in a 9% account today. He intends to deposit another 3,000 at
the end of 2yrs. He plans to purchase, in 5yrs, his favourite shoes worth 5,000. Calculate
the money that will be left in his account one year after the purchase. Ans. 1,300.39
CONTINUOUS COMPOUNDING
Continuous Compounding = it is assumed that cash payments occur once per year, but the
compounding is continuous throughout the year.
Discrete Compounding = the interest is compounded at the end of each period of the same
finite length, such as monthly, daily, quarterly, semi-annually, annually.
where: P – Present worth

F – Future worth
r – rate of continuous compounding
n – number of periods
Illustrative Examples:
1. What rate compounded quarterly is equivalent to 12% compounded
a. Annually?
b. Semi-annually?
c. Continuously? Ans. 11.49%;12.18%; 11.83%
2. If the nominal rate is 3%. How much 5,000 worth in 10yrs in a continuous compounded
account? Ans. 6,749.29
3. A man wishes to have P40,000 in a certain fund at the end of 8 years. How much should
he invest in a fund that will pay 6% compounded continuously? Ans. P24,751.34
4. Compute the nominal interest rate of a continuously compounded loan if the effective
interest rate is 25% Ans. 22.31%

Formula For Future Worth Compound Interest

Uploaded by

Copyright:

Available Formats

Formula For Future Worth Compound Interest

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

Formula For Future Worth Compound Interest

Uploaded by

Copyright:

Available Formats

COMPOUND INTEREST

Interest Principal at Beginning Interest earned Amount at end of period

Formula for future worth compound interest

Where: = “single payment compound amount factor”

Formula for single payment present worth factor

Where: = “single payment present worth factor”

B. EFFECTIVE RATE OF INTEREST

• Is a graphical representation of cash flows drawn on a time scale.

where: P – Present worth

You might also like