The Compound Interest

For many financial transactions, compound interest was commonly used instead
of simple interest. In this type of interest, the principal increases by adding the
interest earned in each interval over a period of time. The basic formula for
computing compounded interest is represented by I = P [(1+i )n -1].

Notations and Definitions of Terms

Notation Terminology Definition of Terms

I Compound Interest An interest resulting from the periodic addition

of simple interest to the principal amount or
simply the difference between the compound
amount and the original principal.

F or A Compound Amount An accumulated amount obtained by adding

the principal and compound interest.

n Conversion period The number of times in a year the interest will

be compounded.

t Time The number of years for which the money

is borrowed or invested

r Rate of Interest A fractional part of the principal that is paid on

loan or investment.

P Present Value of F This is the principal P, that will accumulate to F if

there is an interest at periodic rate I for n
conversion periods.
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 8

In this section, the following formulas will be used:

Required Formula

Compound Interest I = P [ (1 + 𝑟 )nt -1 ]

𝑛

Compound Amount A or A = P (1+𝑟)nt

Final amount F 𝑛

𝐹
Present value P P= 𝑟 n
(1:
t )
𝑛

Interest rate r r = n[( 𝐹 )1/nt -1]

𝑃
𝐹
𝑙𝑜𝑔 ( )
𝑃
Time t t= 𝑟
𝑛 [𝑙𝑜𝑔(1: )]
𝑛

Solving for Compound Interest

With compound interest, you’re not just earning interest on your principal
balance. Even your interest earns interest. Compound interest is when you add the
earned interest back into your principal balance, which then earns you even more
interest, compounding your returns. In computing for compound interest, this
formula will be use:

I = P [ (1 + 𝒓 )nt -1 ]
𝒏
Take Note:

If the problem does not

Wherein; specify the conversion period,

then it is assumed to be
P=
compounded annually.
Principal r =

rate
n = number of times in a year the interest will be

compounded t = number of years

 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 9

Illustrative Examples

Example
1.1

Find the interest earned on ₱15,000.00 for 1 year at 7% compounded semi- annually.

Solution: The problem provides the following information: P = ₱15,000.00, r = 7% or 0.07,

t = 1 year and n = 2 (semi-annually). Substitute these values to the formula of compound
interest,

I = P [ (1 + 𝒓 )nt -1 ]
𝒏

I = ₱15,000.00 [(1 + 0.07 )2(1) -1 ]

2

I = ₱15,000.00 [(1 + 0.035 )2 -1 ]

I = ₱15,000.00 [(1.035 )2 -1 ]

I = ₱15,000.00 [(1.071225) -1] I = ₱15,000.00 (0.071225)

I = ₱1,068.38

Therefore, the interest earned on ₱15,000.00 for 1 year

at 7% compounded semi-annually is ₱1,068.38.

Example
1.2

Mr. Dizon is planning to invest his money in an investing company. Find the compound interest
that he will earned if he invest ₱35,700.00, computed at 5% quarterly for 2 years.

Solution: The problem provides the following information: P = ₱35,700.00, r = 5% or 0.05, t =

2 years and n = 4 (quarterly). Substitute these values to the formula of compound
interest,
BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
0

I = P [ (1 + 𝒓 )nt -1 ]
𝒏

I = ₱35,700.00 [(1 + 0.05 )4(2) -1 ]

4

I = ₱35,700.00 [(1 + 0.0125 )8 -1 ]

I = ₱35,700.00 [(1.0125 )8 -1 ]

I = ₱35,700.00 [(1.10448610118) -1]

I = ₱35,700.00 (0.10448610118)
I = ₱3,730.15

Therefore, the interest that Mr. Dizon will earn on ₱35,700.00

investment for 2 years at 5% compounded quarterly is ₱3,730.15.

Example
1.3

Find the interest earned on ₱50,000.00 at 15% interest rate compounded monthly for 4
years.

Solution: The problem provides the following information: P = ₱50,000.00, r = 15% or

0.15, t = 4 years and n = 12 (monthly). Substitute these values to the formula of
compound interest,

I = P [ (1 + 𝒓 )nt -1 ]
𝒏

I = ₱50,000.00 [(1 + 0.15 )12(4) -1 ]

12

I = ₱50,000.00 [(1 + 0.0125 )48 -1 ]

I = ₱50,000.00 [(1.0125 )48 -1 ]

I = ₱50,000.00 [(1.81535485305) -1] I = ₱50,000.00

(0.81535485305)
I = ₱40,767.74

Therefore, the interest earned on ₱50,000.00 for 4 years at

15% compounded monthly is ₱40,767.74.
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
1

Solving for Compound Amount

Compounding is the process in which an asset's earnings, from either capital

gains or interest, are reinvested to generate additional earnings over time. This growth,
calculated using exponential functions, occurs because the investment will generate
earnings from both its initial principal and the accumulated earnings from preceding
periods. Compound amount or Future value refers to an accumulated amount
obtained by adding the principal and compound interest.

The formula below shows how compound amount A will be solved,

A = P (1+ 𝒓)nt
𝒏

Wherein;

P = Principal

r = rate

n = number of times in a year the interest will be compounded

t = number of years

Illustrative Examples

Example
2.1

A self-employed photographer deposits ₱7,0000.00 in an account paying 4.75% compounded

semi-annually. How much will the photographer have in this account after 3 years?

Solution: The problem provides the following information: P = ₱7,000.00, r = 4.75% or

0.0475, t = 3 years and n = 2 (semi-annually). Substitute these values to the formula of
compound amount,
BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
2

A = P (1+ 𝒓)nt
𝒏

A = ₱7,000.00 (1+ 0.0475)2(3)

2

A = ₱7,000.00 (1+0.02375)6

A = ₱7,000.00 (1.02375)6
A = ₱7,000.00 (1.1512336852)

A = ₱8,058.64

Therefore, the photographer will have ₱8,058.64 after 3 years if he

invest his ₱7,000.00at 4.75% rate, compounded semi-annually.

Example 2.2

A newly married couple invested ₱240,000.00 in an account that pays 13%

compounded quarterly for the purchase of house and lot. How much will the
couple have after 6 years?

Solution: The problem provides the following information: P = ₱240,000.00, r= 13%

or 0.13, t = 6 years and n = 4 (quarterly). Substitute these values to the formula of
compound amount,

A = P (1+ 𝒓)nt
𝒏

A = ₱240,000.00 (1+ 0.13)4(6)

4

A = ₱240,000.00 (1+0.0325)24

A = ₱240,000.00 (1.0.325)24

A = ₱240,000.00 (2.15457416434)

A = ₱517,097.80

Therefore, the couple will have ₱517,097.80 after 6 years.

 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
3

Let’s Try This!

Problem Solving

Direction: answer the problems given below by showing your complete

solutions.

1. Jessica borrowed ₱11,200.00 from a bank that charges 10% compounded

semi-annually. How much interest must she pay after 1 year?

2. Mrs. Linda wants to give her daughter a gift for her 18th birthday. She
plans to buy her a new car. However, she is ₱32,300.00 short to buy it. She
decided to take out a loan in a bank which offers 12% interest rate,
compounded quarterly for 2 years. How much interest does she need to
pay?

3. Jeremy decided to invest his 13 th month pay on an account that will give
him 10% interest rate, compounded semi-annually. How much money
will Jeremy have in this account after 5 years?

4. If Sheena deposits ₱3,450.00 in an account that pays 9%

converted semi-annually, how much will be in her account
at the end of 5 years and 6 months?
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
4

Solving for Present Value

The present value of an amount is the amount needed now to accumulate (A)
in the time (t). In simple words, present value also refers to the principal (P).

The formula for the present value is as follows:

𝐹
P=
(1:𝑟) nt
𝑛

Wherein,

F = Future Value

r = Rate of

Interest t = Time

I = Interest

n= number of times in a year the interest will be compounded

Illustrative Example

Example
3.1

How much amount should be invested to accumulate ₱87,000.00 at the

end of 6 years if money earns 9% interest rate, compounded quarterly?

Solution: The problem provides the following information: F = ₱87,000.00, r = 9% or

0.09, t = 6 years and n = 4 (quarterly). Substitute these values to the formula of present
value of compound interest,
BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
5

F
P= nt
(1:r)n

P = 87,000.00
(1:0.09) 4(6)
4

P = 87,000.00
(1:0.09) 24
4

87,000.00
P=
(1:0.0225) 24

P = 87,000.00
24
(1.0225)

87,000.00
P=
(1.70576657609)

P = ₱51,003.46

Therefore, the present value to be invested is

₱51,003.46.

Example
3.2

How much amount should be invested to accumulate ₱39,800.00 at the

end of 3 years if money earns 12.5% interest rate, compounded monthly?

Solution: The problem provides the following information: F = ₱39,800.00, r = 12.5%

or 0.125, t = 3 years and n = 12 (monthly). Substitute these values to the formula of
present value of compound interest,

𝑭
P= nt
(𝟏:𝒓 )𝒏
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
6

P = 39,800.00
(1:0.125) 12(3)
12

P = 39,800.00
(1:0.125) 36
12

39,800.00
P=
(1:0.00104) 36

P = 39,800.000
(1.00104) 36

39,800.000
P=
(1.45217195149)

P = ₱26,787.46

Therefore, the present value to be invested is

₱26,787.46.

Solving for the Rate of Interest

Rate of Interest refers to the proportion of a loan that is charged as interest

to the borrower, typically expressed as an annual percentage of the loan outstanding.
In solving for the rate of interest of a compound interest, the formula below will be
used;

r = n[( 𝑭 )1/nt -
𝑷
1]
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
7

Wherein,

F = Future Value

P= Present Value/

Principal t = Time

I = Interest

n= number of times in a year the interest will be compounded

Illustrative Example

Example
4.1

Justine invested ₱50,000.00 for 2 years. At what rate of interest converted

monthly did his money earned if he received ₱61,000.000 at the end of term?

Solution: The problem provides the following information: P= ₱50,000.00, F=

₱61,000.00, t = 2 years and n= 12 (monthly). Substitute these values to the formula,

r = n[( 𝐅 )1/nt -
𝐏
1]
r = 12[( ₱61,000.00 )1/(12)(2) -1]
₱50,000.00

r = 12[( ₱61,000.00 )1/24 -1]

₱50,000.00

r = 12 [(1.22)0.04166667 -1]

r = 12 (1.008638375553 -1)

r = 12 (0.008638375553)

r = 0.0998 or 9.98%

Therefore, Justine invested his money at 9.98% interest

rate.
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
8

Example
4.2

In preparation for his son educational tour 18 months from now, Jeff invested ₱21,000.00
and wished to have ₱35,000.00 by that time. At what rate, converted monthly should
the money be invested?

Solution: The problem provides the following information: P= ₱21,000.00, F=

₱35,000.00, t = 18 months or 1.5 years and n= 12 (monthly). Substitute these
values to the formula,

r = n[( 𝐅 )1/nt -
𝐏
1]
r = 12[( ₱35,000.00 )1/(12)(1.5) -1]
₱21,000.00

r = 12[( ₱35,000.00 )1/18 -1]

₱21,000.00

r = 12 [(1.67)0.055555555555 -1]

r = 12 (1.02878572737-1)

r = 12 (0.02878572737)

r = 0.3454 or 34.54%

Therefore, Jeff should invest his money at 34.54% interest

rate.

Solving for the Time (Number of Years)

The most difficult part in compound interest is calculating the number of

years to come up with the expected amount. The computation involves the use
of logarithms.
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 1
9

The formula below shows how the time (number of years) for compounding
interest is computed,

𝒍𝒐𝒈 (𝑭)
t= 𝑷
𝒏 [𝒍𝒐𝒈(𝟏:𝒓𝒏)]

Wherein,

F = Future Value

P= Present Value/

Principal I = Interest

n= number of times in a year the interest will be

compounded r = rate of interest

Illustrative Example:

Example
5.1

In how many years will ₱23,500.00 accumulate to ₱30,000.00 if invested at 5%

compounded quarterly? How about ₱35,000?

Solution: The problem provides the following information: P= ₱23,500.00, F=

₱30,000.00, r = 5% or 0.05 n= 4 (quarterly). Substitute these values to the formula,

𝒍𝒐𝒈 (𝑭)
𝑷
t=
𝒏 [𝒍𝒐𝒈(𝟏:𝒓𝒏)]

log ( 30,000 )
t =23,5000
4 [log(1:0.05)]
4
BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 2
0

log(1.276595744)
t =4 [𝑙𝑜𝑔(1:0.0125)]

log(1.276595744)
t = 4 [𝑙𝑜𝑔(1.0125)]

0.10605339221
t = 4 [0.00539503188]

0.10605339221
t =0.02158012754]

t = 4.91 years or approximately 4 years and 11 months

Therefore, ₱23,500.00 will accumulate to ₱30,000.000 in approximately

4 years and 11 months.

35,000
log ( 23,5000 )
t = 4 [log(1:0.05)]
4

log(1.48936170213)
t = 4 [𝑙𝑜𝑔(1:0.0125)]

log(1.48936170213)
t= 4 [𝑙𝑜𝑔(1.0125)]

0.17300018207
t = 4 [0.00539503188]

0.17300018207
t =0.02158012754]

t = 8.016 years or approximately 8 years.

Therefore, ₱23,500.00 will accumulate to ₱35,000.000 in approximately

8 years.
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 2
1

Let’s Try This!

Test Yourself

Direction: Solved what is asked in each item. Don’t forget to show your
solutions.

1. Find the compound amount: ₱25,000 at 8% interest compounded semi-

annually for 2 years and 6 months

2. Find the compound interest: ₱13,800 at 2.5% interest

compounded monthly for 6 years

3. Find the present value or principal: ₱40,000 at 12% interest

compounded quarterly for 3 years

4. Find the interest rate: ₱34,000 accumulate to ₱54,800 for 5 years

compounded quarterly

5. Find the time: ₱8,900 accumulate to ₱71,500 at 12.5%

compounded semi-annually
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 2
2
LESSON SUMMARY

Interest is the payment for the use of one’s money.

Compound interest is when interest paid both on the original amount

of money and on the interest it has already earned.

Future value or Compound Amount of an amount P is the value of P

including all the interest earned at some future time.

Present Value of an amount is the amount needed now to

accumulate (A) in the time (t).

Annually means covering the period of a year.

Semi-annually means an event occurs regularly every 6 months.

Quarterly means recurring, issued, or spaced at 3-month intervals.

Monthly it means done, happening, appearing, etc., once a month

 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 2
3

POST TEST

A. Solving. Answer each of the following problems by showing your complete

solution.

1. Jovy invested ₱25,000 in a bank that charges 12% compounded

quarterly. How much is in her account after 4 years?

Solution:

2. XYZ Academy anticipated additional expenses of ₱376,800 for a new

equipment needed for offering a new course 5 years from now. How much
should be invested in an account that earns 19% compounded monthly?

Solution:

3. How much will be needed to settle an obligation of ₱32,650 at 12%

interest rate compounded semi-annually for 2 years?

Solution:

4. If Joey received a total amount of ₱67,500 five years and 3 months after
depositing ₱42,950 in an account, at what rate of interest converted monthly
did her money earned?

Solution:

5. When is ₱78,800 due if its present value of ₱61,500 is invested at 10.75%

compounded monthly?
Solution:
 BASIC CONCEPT OF COMPOUND INTEREST • NU BALIWAG 2
4
REFERENCES

Ashford, K. (2020, November 24). The Life-Changing Magic Of Compound Interest.

Forbes Advisor. https://www.forbes.com/advisor/investing/compound-interest/

Compound Interest Definition. (n.d.). Investopedia. Retrieved August 16, 2021, from

https://www.investopedia.com/terms/c/compoundinterest.asp

Aoanan, G., Plarizan, M., Regidor, B., & Simbulas, L. (2019). General Mathematics for

Senior High School (Revised ed.). C & E Publishing Inc.

Dimasuay, L., Alcala, J., Palacio, J., & Domingo, A. (2016). General Mathematics. C & E

Publishing Inc.

iPracticeMath.com. (n.d.). Compound Interest Time Period Calculation. IPracticeMath.

Retrieved August 16, 2021, from

https://www.ipracticemath.com/learn/consumermath/compound-interest-time-

period- calculation#:%7E:text=Calculating%20the%20Time%2DPeriod

%20(or,involves%20t he%20use%20of%20logarithms.&text=1)%20Future%20amount

%2C%20principal%2 C,per%20year%20should%20be%20given.

Learn About Compounding. (n.d.). Investopedia. Retrieved August 16, 2021, from

https://www.investopedia.com/terms/c/compounding.asp

Simple Interest vs. Compound Interest: The Main Differences. (n.d.). Investopedia.

Retrieved August 16, 2021, from

https://www.investopedia.com/ask/answers/042315/what-difference-between-

compounding-interest-and-simple-interest.asp

https://www.deped.gov.ph/wp-content/uploads/2019/01/SHS-Core_General-Math-

CG.pdf