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Lesson 27 - Finding Interest Rate and Time in Compound Interest

1. The document defines key terms related to compound interest such as nominal rate, effective rate, conversion period, and frequency of conversion. 2. It provides formulas for calculating the time required for compound interest when compounded more than once per year and for calculating the interest rate when compounded more than once per year. 3. Two examples are given to demonstrate calculating time to reach a target amount and calculating the nominal interest rate given other parameters.

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April Joy Lascuña
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239 views12 pages

Lesson 27 - Finding Interest Rate and Time in Compound Interest

1. The document defines key terms related to compound interest such as nominal rate, effective rate, conversion period, and frequency of conversion. 2. It provides formulas for calculating the time required for compound interest when compounded more than once per year and for calculating the interest rate when compounded more than once per year. 3. Two examples are given to demonstrate calculating time to reach a target amount and calculating the nominal interest rate given other parameters.

Uploaded by

April Joy Lascuña
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LESSON OBJECTIVES:

1. Define useful terms in


compound interest.
2. Compute the interest
rate and time for
compound interest.
Definition of Terms:
 Frequency of conversions
(m) – number of conversion
periods in one year.
 Conversion or interest
period – time between
successive conversions of
interest.
 Total number of conversion
periods (n)
n = mt
n = (frequency of conversion) x (time,in years)
 Nominal rate (i ) – annual (m)

rate of interest
 Rate of interest for each
conversion period (j)
i
(m)
annual rate of interest
j= =
m frequency of conversion

 Equivalent rates – two


annual rates with different
conversion periods that
will earn the same
maturity value for the
same time/term.
 Nominal rate – annual
interest rate (may be
compounded more
than once a year)
 Effective rate – rate
when compounded
annually will give the
same compound each
year with the nominal
(1)
rate, denoted by i
Conversion
m period
Annually 1 1 year
Semi-annually 2 6 months
Quarterly 4 3 months
Monthly 12 1 month
Daily 365 1 day
Finding Time for Compound
Interest (Compounded more
than once a year):
(1) Solve the number of periods:
F
log( )
P
n=
log ⁡(1+ j)

(2) Solve for t: t=


n
m
Finding Interest Rate, j
(Compounded more than
once a year): n
F=(1+ j)
Example:
How long will it take ₱3,000
to accumulate to ₱3,500 in
a bank savings account at
0.25% compounded
monthly?
Example:
At what nominal rate
compounded semi-annually
will ₱10,000 accumulate to
₱15,000 in 10 years?

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