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Conceptual framework

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9 views19 pages

ExportDocument 1

Conceptual framework

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santosheart71
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Compound Interest

 Simple interest is calculated on the


principal, or original, amount of a
loan.
 Compound interest is calculated on
the principal amount and also on the
accumulated interest of previous
periods, and can thus be regarded as
“interest on interest.
P= 100,000.00
r= 10%
Simple Interest Compound Interest
Year1 110,000.00 110,000.00
Year2 120,000.00 121,000.00
Year3 130,000.00 133,100.00
Year4 140,000.00 146,410.00
Year5 150,000.00 161,051.00
Year6 160,000.00 177,156.10
Year7 170,000.00 194,871.71
Year8 180,000.00 214,358.88
Year9 190,000.00 235,794.77
Year10 200,000.00 259,374.25
P= 100,000
r= 10% Compound Interest
Semi-
Simple Interest Annually annually Quarterly Monthly
Year1 110,000.00 110,000.00 110,250.00 110,381.29 110,471.31
Year2 120,000.00 121,000.00 121,550.63 121,840.29 122,039.10
Year3 130,000.00 133,100.00 134,009.56 134,488.88 134,818.18
Year4 140,000.00 146,410.00 147,745.54 148,450.56 148,935.41
Year5 150,000.00 161,051.00 162,889.46 163,861.64 164,530.89
Year6 160,000.00 177,156.10 179,585.63 180,872.59 181,759.43
Year7 170,000.00 194,871.71 197,993.16 199,649.50 200,792.02
Year8 180,000.00 214,358.88 218,287.46 220,375.69 221,817.56
Year9 190,000.00 235,794.77 240,661.92 243,253.53 245,044.76
Year10 200,000.00 259,374.25 265,329.77 268,506.38 270,704.15
Simple and Compound Interest
450,000.00

400,000.00

350,000.00

300,000.00

250,000.00

200,000.00

150,000.00

100,000.00

50,000.00

-
0 2 4 6 8 10 12 14 16
Simpe Interest Anually
Compound Amount Formula
𝑭 = 𝑷(𝟏 + 𝒊) 𝒏

 F=finalamount
 P=principal or original amount
 i=interest rate per period
𝒋
 Where 𝒊 = , j=nominal rate and m=number of interest
𝒎
compounding period in 1 year
 n=number of interest compounding period
 Where 𝒏 = 𝒎𝒕, t= number of years
Conversion of Nominal rate to
interest compounding period
Nominal
rate(j) Compounded m i
12% annually 1 12%
12% semi-annually 2 6%
12% quarterly 4 3%
12% monthly 12 1%
Example
 Findthe compound Interest due at
the end of 5 years if P 10,000 is
invested 6% compounded annually,
semi-annually, quarterly and monthly.
Compound Amount Table Factors

Finding Compound Amount (Future Value)


Compound amount = Principal * Table Factor
Present Value

𝑭 −𝒏
𝑷= (𝟏+𝒊)𝒏
= 𝑭(𝟏 + 𝒊)
F=futurevalue
P=Present Value
i=periodic rate
n=number of periods
 In
order to accumulate P 1,000,000
ten years from now, how much should
be invested today at 10%
compounded semi-annually?
Table Factors for Present Value

Finding Present Value


Present value P = Future value * Table Factor
Finding Future Value and Present
Value if n is not whole
Future Value if n is not a whole
number
 Findthe compound
amount at the end of 3
years and 5 month if P
20,000 is invested at 8%
compounded semi-
annually.
Present Value if n is not a whole
number

 Findthe amount to be
invested today in order to
accumulate P 300,000 after 5
years and 4 months if the
money will grow at 10%
compounded quarterly.
Nominal Rate and Effective rates.

 Theeffective rate of interest is the


equivalent annual rate of interest
which is compounded annually
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒂𝒓𝒏𝒆𝒅 𝒊𝒏 𝒐𝒏𝒆 𝒚𝒆𝒂𝒓
𝐸=
𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 𝒂𝒕 𝒕𝒉𝒆 𝒃𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝒐𝒇 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓
 Find the effective rate of
an investment of P 100,000
if the money is yields 8%
compounded quarterly for
one year.
 A lending institution is
offering loans at 17
½% effective rate, at
what nominal rate
compounded
quarterly could a
borrower just as well
borrow that will pay
the same amount of
interest?

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