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Interest-3 5

The document explains the concept of compound interest, highlighting its definition as interest paid on interest and the importance of reinvesting earned interest. It provides the fundamental formula for calculating compound interest and includes examples to illustrate the calculations. Additionally, it presents experiential learning questions for practice in computing compound amounts and interest.

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angeljayjatico707
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9 views2 pages

Interest-3 5

The document explains the concept of compound interest, highlighting its definition as interest paid on interest and the importance of reinvesting earned interest. It provides the fundamental formula for calculating compound interest and includes examples to illustrate the calculations. Additionally, it presents experiential learning questions for practice in computing compound amounts and interest.

Uploaded by

angeljayjatico707
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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 2

Learning Target: 1. Know the formula in computing compound interest.


2. Calculate for the compound interest using the formula.

I. CONCEPT NOTES:
The yield of simple interest is constant throughout the investment term. But when such yield
is added to the principal at regular intervals, and the sum becomes the new principal, then the
interest is said to be compounded or converted. This means that, at compound interest, the interest
earned at a cut-off date is automatically reinvested to earn more interest. Thus, compound interest
is defined as interest being paid on interest. The accumulated amount at the end of the period, the
original principal and the compound interest, is called the final amount or maturity value.
The time between the successive conversions of interest into principal is called conversion
period (m). It refers to the number of unit of time in one-year basis for computing interest which
could be either;
a) Annually ---------- once a year
b) Semi-annually---- twice a year
c) Quarterly --------- 4 times a year
d) Monthly ---------- 12 times a year

The fundamental formula for compound amount is:


F = P (1 + r/m) mt or F = P (1 + i)n
Where:
F = final amount or compound amount
P = original principal
i = interest per conversion period which is equal to nominal rate (r) divided by the
conversion period (m)
n = total number of conversion periods for the whole term; number of conversions
periods per year (m) multiplied by the time (t)
Example 1:
Find the compound interest on P1,000 at the end of 8 years at 8 % compounded quarterly.
Solution:
Given:
P = P1,000 r = 8%
K =4 t = 8 years
8%
i = = 2% n = 4(8) = 32 interest periods
4
Form the formula F = P (1 + i) n we have the compound amount
F = 1,000(1 + 2%)32
F = 1,000 (1.884540)
F = P 1,884.54
The compound interest is P 1884.54 - P1,000 = P884.54
Example 2:
Amiel invested P120, 000 in a time deposited account at 7.5% compounded semi-annually.
How much is the value of the fund if it is withdrawn after two years and 3 months.
Solution:
Given:
P = P120,000 r = 7.5% m=2 t = 2 years and 3 months
i = 0.0375 n = 2.25(2) = 4.5
F = P (1 + i)n
F = 120,000(1 + 0.0375)4.5
F = 120,000(1.0375)4.5
F = P141, 621.02

The compound interest is I = F – P


I = 141,621.02 - 120,000 = P21,621.02
II. EXPERIENTIAL LEARNING:
Answer the following questions.
1. Find the compound amount and interest if P1,000 is invested at an interest rate of 9%
compounded annually for 3 years.
2. Using the compound interest formula, find the accumulated value and interest of P2,000
in 5 years if it is invested at 11% compounded quarterly.
3. If you have a bank account that has P1000, and your bank compounds the interest twice a
year at an interest rate of 6%, how much money do you have in your account after 2
years?

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