LESSON 4:

COMPOUNDING MORE
THAN ONCE A YEAR
DEFINITION OF TERMS
❖ Conversion or Interest Period (t) – time between
successive conversions of interest.

❖ Frequency of Conversion (m) – number of

conversion periods in one year.

❖ Nominal Rate (r) – annual rate of interest.

DEFINITION OF TERMS
❖ Rate (i) – rate of interest for each conversion period.

𝑟 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑖= =
𝑚 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛

❖ Total number of conversion periods (n)

𝑛 = 𝑚𝑡 = (𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛)(𝑡𝑖𝑚𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠)
CONVERSION PERIOD
annually : 𝒎 = 𝟏

semi-annually : 𝒎 = 𝟐

quarterly : 𝒎 = 𝟒

monthly : 𝒎 = 𝟏𝟐

daily : 𝒎 = 𝟑𝟔𝟓
EXAMPLES
1. Nominal rates and the corresponding frequencies of
conversion and interest rate for each period.
frequency of conversion interest rate per conversion
nominal rate (r)
conversion (m) period period (i)
2% compounded 𝑟 0.02
𝑚=1 1 year 𝑖= = = 0.02 = 2%
annually 𝑟 = 0.02 𝑚 1
2% compounded 𝑟 0.02
𝑚=2 6 months 𝑖= = = 0.01 = 1%
semi-annually 𝑟 = 0.02 𝑚 2
2% compounded 𝑟 0.02
𝑚=4 3 months 𝑖= = = 0.005 = 0.5%
quarterly 𝑟 = 0.02 𝑚 4
2% compounded 𝑟 0.02
𝑚 = 12 1 month 𝑖= = = 0.0016 = 0.16ത %
monthly 𝑟 = 0.02 𝑚 12
2% compounded 𝑚 = 365 𝑟 0.02
1 day 𝑖= =
daily 𝑟 = 0.02 𝑚 365
FORMULA FOR MATURITY VALUE,
COMPOUNDING m TIMES A YEAR

𝒏
𝑭 = 𝑷(𝟏 + 𝒊) Where:
F – future value (maturity) at the
end of the term

𝒓 P – principal/present value
r – nominal rate
𝒊= 𝒏 = 𝒎𝒕
𝒎 t – time (in year)
m – frequency of conversion
EXAMPLES
2. Find the maturity value and interest of ₱10,000 is deposited in a
bank at 2% compounded quarterly for 5 years?

3. Find the maturity value and interest if ₱10,000 is deposited at

2% compounded monthly for 5 years?

4. Chris borrows ₱50,000 and promises to pay the principal and

interest at 12% compounded monthly. How much must he repay
after 6 years?
FORMULA FOR PRESENT VALUE
(P) AT COMPOUNDED INTEREST

𝑭 Where:
𝑷= 𝒏 F – future value (maturity) at the end
(𝟏 + 𝒊) of the term
P – principal/present value
r – nominal rate
𝒓 t – time (in year)
𝒊= 𝒏 = 𝒎𝒕 m – frequency of conversion
𝒎
EXAMPLES
5. Find the present value of ₱50,000 due in 4 years if money is
invested at 12% compounded semi-annually.

6. What is the present value of ₱25,000 due in 2 years and 6

months if money is worth 10% compounded quarterly?
SEATWORK
1. Fill in the blanks with the correct answer.

a. When money is compounded monthly, the frequency of conversion is ________.

b. When the annual interest rate is 16% compounded quarterly the interest rate in
conversion period is _________.
c. If the interest rate per conversion period is 1% and money is compounded
monthly, the nominal rate is _________.
d. When the term is 3 years and 6 months and money is compounded semi-
annually, the total number of conversion period is __________.
e. When the total number of conversion periods is 12 and the term is 6 years, then
money is compounded ___________.
 LESSON 5:
FINDING INTEREST
RATE AND TIME IN
COMPOUND INTEREST
 FORMULA FOR FINDING THE NUMBER
OF PERIODS n, for COMPOUND
INTEREST

𝑭
𝒍𝒐𝒈 Where:

𝒏= 𝑷 P – principal or present value

r – interest rate
𝒍𝒐𝒈(𝟏 + 𝒊) F – maturity (future) value at the
end of the term
t – time/term (years)
𝒓 𝒏 m – frequency of conversion
𝒊= 𝒕= n – total number of conversion
𝒎 𝒎 periods
EXAMPLES
1. How long will it take ₱3,000 to accumulate ₱3,500 in a bank
savings account at 0.25% compounded monthly?

2. How long will it take ₱1,000 to earn ₱300 if the interest is

12% compounded semi-annually?
FORMULA FOR FINDING THE INTEREST
RATE i, PER CONVERSION PERIOD

𝟏 Where:
𝑭 𝒏 P – principal or present value
𝒊= −𝟏 t – time/term (yrs)
𝑷 F – maturity (future) value at
the end of the term
m – frequency of conversion
𝒏 = 𝒎𝒕 n – total number of conversion
periods
𝒓 = 𝒎𝒊
EXAMPLES
3. At what nominal rate compounded semi-annually will
₱10,000 accumulate to ₱15,000 in 10 years?
SEATWORK
2. Find the unknown.
A B C D E

𝐹 = 2,000 𝐹 = 2,000 𝐹 = 30,000 𝐹 = 30,000 𝐹 = 30,000

𝑃 = 1,750 𝑃 = 1,750 𝑃 = 10,000 𝑃 = 10,000 𝑃 = 10,000
𝑚=2 𝑚=2 𝑚=4 𝑚=4 𝑚=4
𝑡 = 4 𝑦𝑒𝑎𝑟𝑠 𝑡 = 4 𝑦𝑒𝑎𝑟𝑠 𝑟 = 16% 𝑟 = 16% 𝑟 = 16%

𝑖 =? 𝑟 =? 𝑟 =? 𝑛 =? 𝑡 =?
HOMEWORK
1. Complete the table by finding the unknown.

total
frequency of interest time in compound
principal nominal number of future
conversion rate per years interest
(P) rate (r) conversion value (F)
(m) period (i) (t) (𝑰𝒄 )
(n)

10,000 8% (1) (2) 15 (3) (4) (5)

6 yrs & 3
30,000 5% (6) (7) months (8) (9) (10)

(11) 12% (12) (13) 10 (14) (15) 50,000

HOMEWORK
2. Find the unknown.
A B C D E

𝐹 = 100,000 𝐹 = 100,000 𝐹 = 18,000 𝐹 = 18,000 𝐹 = 18,000

𝑃 = 10,000 𝑃 = 10,000 𝑃 = 12,000 𝑃 = 12,000 𝑃 = 12,000
𝑚 = 12 𝑚 = 12 𝑚=2 𝑚=2 𝑚=2
𝑡 = 8 𝑦𝑒𝑎𝑟𝑠 𝑡 = 8 𝑦𝑒𝑎𝑟𝑠 𝑟 = 12% 𝑟 = 12% 𝑟 = 12%

𝑖 =? 𝑟 =? 𝑟 =? 𝑛 =? 𝑡 =?