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LESSON 6+ COMPOUND INTEREST Student

Compound interest involves calculating interest on previously earned interest over time. It is more complex than simple interest which only calculates interest once over a period. The document defines key terms related to compound interest, shows how to calculate compound interest using formulas, and provides examples of compound interest calculations for various scenarios involving different principal amounts, interest rates, compounding frequencies and time periods.

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John Daniel Berdos
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55 views15 pages

LESSON 6+ COMPOUND INTEREST Student

Compound interest involves calculating interest on previously earned interest over time. It is more complex than simple interest which only calculates interest once over a period. The document defines key terms related to compound interest, shows how to calculate compound interest using formulas, and provides examples of compound interest calculations for various scenarios involving different principal amounts, interest rates, compounding frequencies and time periods.

Uploaded by

John Daniel Berdos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson 6: Compound Interest

COMPOUND INTEREST

▪ Simple interest calculates for the added amount


only once for the given time.
▪ Compound interest involves more complex
calculation since, when applicable, it calculates
interest based on previously earned interest within
the time given.
Lesson 6: Compound Interest

At the end of the lesson, the student will be able to:

❖ Define key terms.


❖ Calculate unknown values in compound interest
problems.
❖ Differentiate simple interest from compound
interest.
Compound Interest
• Interest earned from previously earned interest
𝑚𝑡
𝑗
𝐶 =𝑃 1+ = 𝑃(1 + 𝑖)𝑛
𝑚
where
C = compound amount
P = present value 𝑖 = 𝑗/𝑚
j = annual interest rate 𝑛 = 𝑚𝑡
m = frequency of conversions
= annually or effective (1), bi-monthly (6), quarterly(4), semi-annually (2), monthly (12)

COMMERCIAL MATHEMATICS
Lesson 2: Compound interest
Examples: Rex invested Php100,000 in an account
offering 8% compounded quarterly. How much will he have at the
end of 6 months?
Given: P = Php100,000 Formula:
t = 6 months 𝐶 = 𝑃(1 + 𝑖)𝑛
j = 0.08
m=4 𝐶 = 𝑃(1 + 𝑖)𝑛
2
i = 0.02 𝐶 = 𝑃ℎ𝑝100,000 1 + 0.02
𝐶 = 𝑃ℎ𝑝104,040
n=2

COMMERCIAL MATHEMATICS
Lesson 2: Compound interest
Example: After 2 years, Neil will receive Php60,114.55 if money
is worth 9.6% compounded semi-annually. How much did he invest
originally?
Formula:
Given: C = Php60,114.55 𝑃 = 𝐶/(1 + 𝑖)𝑛
t = 2 years
j = 0.048
m=2 𝑃 = 𝐶/(1 + 𝑖)𝑛
4
i = 0.048 𝑃 = 𝑃ℎ𝑝60,114.55/ 1 + 0.048
𝐶 = 𝑃ℎ𝑝49835.00
n=4

COMMERCIAL MATHEMATICS
Lesson 2: Compound interest
1. Calculate for the maturity value for Php5,000 at 10% simple interest rate for
1 year.
2. Calculate for the maturity value for Php5,000 at 5% simple interest rate for
1 year. Using the result as the principal, find the new maturity value at 5%
simple interest rate also for 1 year.
3. What is the present value of Php65,000 at 11% compounded annually for 4
years?
4. A Php1,000,000-trust fund was set up and to be used by an 8-year old
nephew when he goes to college. In 8 years, how much will the fund be if
the investment rate is 7.5% compounded quarterly?
5. Ryza borrows Php150,000. At what rate compounded bi-monthly will her
interest be if she agrees to pay Php10,000 more at the end of 2 years?
6. Find the amount at the end of 5 years if Php17,535 is invested at 2.45%
compounded quarterly.
7. If money is worth 6% compounded bi-monthly, find the present value of
Php125,700 for 2 years.
8. If the rate is at 1.25% effective, how long will Php5,000 become Php5,500?
Summary:

❖ Compound interest gives higher interest than simple interest.

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