5.2.

COMPOUND INTEREST - Ic

For classroom discussion only

5.2. COMPOUND INTEREST

Compound interest ( 𝑰𝒄 ) is
the addition of interest to the
principal sum of loan or
deposit and can also be
described as “Interest on
interest”. [ 𝑰𝒄 = F – P ]
For classroom discussion only Math Unlocked, Chapter 4 p. 85
 The Final Amount (F) is called the
compound amount. The difference
between the compound amount and
the original principal is called the
compound interest. [ F = P + 𝑰𝒄 ]

For classroom discussion only

COMPOUNDINTEREST

When compounding is done more

than once in a year, the compounding
period may be

2 4 12
PERIODS PERIODS PERIODS

Semi-annually Quarterly Monthly

 Interest may be compounded or
converted in a year (m)
Annually (once a year): 𝑚=1
Semi-annually:(twice a year): 𝑚 = 2
Quarterly (4 times a year) 𝑚=4
Monthly (12 times a year) 𝑚 = 12
or even daily. 𝑚 = 365
For classroom discussion only
DEFINITION OF TERMS

Future Value ( 𝐹) – also known as

compound/final amount or maturity
value
– defined as the sum of the principal
and the compound interest
(𝐹 = 𝑃 + 𝐼! )
Present value ( 𝑃 ) – original principal
For classroom discussion only
 Conversion or interest period – time
between two successive conversions of
interest.
Frequency of conversion (𝑚) – number of
conversion periods in one year

Nominal rate (𝑖) – stated annual rate of

interest, unless indicated, the interest is
compounded annually.
For classroom discussion only
 Periodic rate ( 𝑗) – interest rate for each conversion
period.
Annual rate of interest (nominal rate)
j=
Frequency of conversion
(")
𝑖 "
j= or simply j =
#
𝑚
For classroom discussion only
 Total number of conversion
period(𝑛)
n = (frequency of conversion)(time
in years)
n=𝒎𝒕

For classroom discussion only

Find the compound amount and interest if ₱ 1,000 is
invested at an interest rate of 9% compounded
annually for 3 years.
Find the compound amount and interest if ₱ 1,000 is invested at an interest rate of 9%
compounded annually for 3 years.

Solution:
The original principal is ₱ 1,000.
The interest in the first year is ₱
The new principal at the end of one year is ₱
The interest in the second year is ₱
The new principal at the end of the 2 years is ₱
The interest in the third year is ₱
The new principal at the end of 3 years is ₱
 Example: If money is invested for 3 years
Frequency Interest One Total
of rate conversion Number of
Nominal rate Conversion per period Conversion
(𝒊(𝒎) ) (𝑚) period period (n)
(𝑗) 𝑛 = 𝑚𝑡
8% compounded 1 1 year
8% (1)(3) = 3
annually
15% compounded semi-
2 7.5% 6 months (2)(3) = 6
annually
12% compounded
4 3% 3 months (4)(3) = 12
quarterly
10% compounded
12 (5/6)% 1 month (12)(3) = 36
monthly

For classroom discussion only

Interest Compounded
Annually
(Compounded Once A
Year)
 MATURITY VALUE “F” OF COMPOUND INTEREST (compounded annually)

For classroom discussion only

 Example 1:

Find the future value and

interest of ₱50,000 if
compounded annually with
an interest of 4% for a period
of 5 years.

For classroom discussion only Math Unlocked, Chapter 4 p. 86

Example 2:

Suppose your father deposited

₱ 10,000 in your bank account at an
annual interest rate of 1.35%
compounded yearly when you graduate
from kindergarten and did not get the
amount until you finish Grade 12. How
much will you have in the account after
12 years of schooling?

For classroom discussion only

Example 3:

Mrs. Bautista deposits ₱ 10,000 in a

savings account at ABC Bank that offers a
rate of 6%.
a. Find the future value of the money
after 3 years compounded annually.
b. Find the interest.

For classroom discussion only Math Unlocked, Chapter 4 p. 86

 Present Value “P” of
Compound Interest
Compounded Annually
 PRESENT VALUE “ P “ OF COMPOUND INTEREST(compounded annually)

From the maturity value formula:

𝐹 = 𝑃(1 + 𝑟)!
Finding the formula for 𝑃, we divide both sides by
(1 + 𝑟)! , so

$ ()
𝑷= or 𝑷 = 𝐹(1 + 𝑟)
(%&')!

For classroom discussion only

Example 4:

Find the present value of

₱ 30,000 due in 2 years if
money is worth 7%
compounded annually.

For classroom discussion only Math Unlocked, Chapter 4 p. 87

 Remark:

Sometimes compound interests are

compounded more than once a year
(e.g. monthly, semi-annually, quarterly,
daily, and etc.). When this happens,
another formula is used to compute the
future value of the compound interest.

For classroom discussion only

Interest Compounded
More Than Once a Year
MATURITY VALUE OF COMPOUND INTEREST m times a year:

For classroom discussion only

 RECALL:
Conversion or interest period – time
between two successive conversions of
interest.
Frequency of conversion (𝑚) – number of
conversion periods in one year

Nominal rate (𝑖 ) – stated annual rate of

interest, unless indicated, the interest is
compounded annually.
For classroom discussion only
 Periodic rate ( 𝑗) – interest rate for each
conversion period
Annual rate of interest (nominal rate)
j=
Frequency of conversion
(")
𝑖 !
j= or simply j =
"
𝑚
For classroom discussion only
 Total number of conversion
period(𝑛)
n = (frequency of conversion)(time
in years)
n=𝒎𝒕

For classroom discussion only

 Remark:

For classroom discussion only

 Present Value of
Compound Interest
compounded
m times a year
PRESENT VALUE OF COMPOUND INTEREST m times a year:

From the maturity value formula, to find 𝑃

$%
𝑖
𝐹 =𝑃 1+
𝑚

& $%
Divide both sides by 1 + , so the result is
$

𝐹 𝑖 '$%
𝑃= $% or 𝑃 =𝐹 1+
𝑖 𝑚
1+
𝑚

For classroom discussion only

Example 4:

Find the future value and

interest of ₱ 40,000 due in 3
years if money is worth 6%
compounded semi-annually.

For classroom discussion only Math Unlocked, Chapter 4 p. 89

Example 5:

How much money should be

deposited in an account today
that earns 4% compounded
quarterly so that it will
accumulate to ₱ 200,000 in five
years?
For classroom discussion only Math Unlocked, Chapter 4 p. 90
Example 6:

A piece of property is purchased on

installment. The buyer makes an
₱ 80,000.00 down payment and owes a
balance of ₱ 150,000.00 in 2 years. Find the
property’s cash value if money is worth 14%
compounded quarterly.

Copyright Ó by Island Publishing House, Inc.

 A piece of property is purchased on installment. The buyer makes an 80,000.00 down
Solution to#6: payment and owes a balance of 150,000.00 in 2 years. Find the property’s cash value if
money is worth 14% compounded quarterly.

𝑪𝒂𝒔𝒉 𝑽𝒂𝒍𝒖𝒆 = down payment(if any) + present value of installment

payment
𝐷𝑜𝑤𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = ₱ 80,000
𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = ₱ 150,000 in 2 years
Solve for the present value P:

Given:
𝐹 = ₱ 150,000
𝑖 = 14% compounded
quarterly
= 0.14(𝑚=4) Solving for the cash value:
𝑡 = 2 years 𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒 =
Unknown: 𝑃
=

Copyright Ó by Island Publishing House, Inc.

Finding the Time “t” in
a Compound Interest
m times a year
 FORMULA FOR FINDING THE TIME t IN A COMPOUND
INTEREST m times a year:

𝐹
log
𝒕 = 𝑃
𝑖
𝑚 𝑙𝑜𝑔 1 +
𝑚

For classroom discussion only

Example 7:

Find the term of investment if a

principal of ₱ 70,000
accumulates to ₱ 76,800 at 7.5%
rate of interest compounded
quarterly.

For classroom discussion only Math Unlocked, Chapter 4 p. 91

 Find the term of investment if a principal of ₱ 70,000 accumulates to ₱ 76,800 at 7.5%
Solution to#7: rate of interest compounded quarterly.

Solving for the time:

Given: 𝐹
log
𝑃
𝑃 = ₱ 70,000 𝑡 =
𝑖
𝑚 𝑙𝑜𝑔 1 +
𝐹 = ₱ 76,800 𝑚
𝑖 = 7.5% compounded
quarterly
= 0.075( 𝑚 = 4)
Unknown: 𝑡

For classroom discussion only

 How long would it take for ₱ 3,000 to accumulate to ₱ 3,500 in a bank savings account
Example#8: at 0.25% compounded monthly?

Solving for the time:

Given: 𝐹
log
𝑃
𝑃 = ₱ 3,000.00 𝑡 =
𝑖
𝑚 𝑙𝑜𝑔 1 +
𝐹 = ₱ 3,500.00 𝑚
𝑖 = 0.25% compounded
monthly
= 0.0025( 𝑚=12)
Unknown: 𝑡

For classroom discussion only

Example 9:

How long would it take for ₱ 28,500 to grow

to ₱ 46,700.57 in a bank savings account if
money is worth 10% compounded
quarterly?

For classroom discussion only

 How long would it take for ₱ 28,500 to grow to ₱ 46,700.57 in a bank savings
Solution to#9: account if money is worth 10% compounded quarterly?

Solving for the time:

Given: 𝐹
log
𝑡 = 𝑃
𝑃 = ₱ 28,500 𝑖
𝑚 𝑙𝑜𝑔 1 +
𝐹 = ₱ 46,700.57 𝑚
𝑖 = 10% compounded
quarterly
= 0.10( 𝑚=4)
Unknown: 𝑡

For classroom discussion only

Nominal Rate( 𝒊 ) in a
Compound Interest m
times a year
 FORMULA FOR FINDING THE NOMINAL RATE( 𝒊 ) IN A
COMPOUND INTEREST m times a year:

mt
!" 𝐹
𝒊=𝑚 −1
𝑃

For classroom discussion only

Example 10:

At what nominal rate compounded

semi-annually will ₱ 10,000
accumulate to ₱ 15,000 in 10 years?

For classroom discussion only

 At what nominal rate compounded semi-annually will ₱ 10,000 accumulate to ₱
Solution to#10: 15,000 in 10 years?

Solving for the nominal rate:

Given: !" 𝐹
𝑖=𝑚 −1
𝑃 = ₱ 10,000 𝑃
𝐹 = ₱ 15,000
𝑡 = 10 years
𝑚=2
#(%&) 15,000
𝑖=2 −1
Unknown: 𝑖 10,000

𝑖 = 0.0410 or 4.10%
For classroom discussion only
Example 11:

At what interest rate compounded

quarterly will money double itself in 10
years?

For classroom discussion only

 At what interest rate compounded quarterly will money double itself in
Solution to#11: 10 years?

Solving for the nominal rate:

=> 𝐹
Given: 𝑖=𝑚 −1
𝑃
𝑃=𝑃
𝐹 = 2𝑃
𝑡 = 10 years
?(AB)
2𝑃
𝑖=4 −1
𝑚=4 𝑃
Unknown: 𝑖
!"
𝑖=4 2 −1

𝑖 = 0.0699 or 6.99%
For classroom discussion only
 Remark:

For classroom discussion only

 Maturity Value of a
Continuous Compound
Interest
 FORMULA FOR MATURITY VALUE OF A
CONTINUOUS COMPOUND INTEREST

- (9) .
𝐹 = 𝑃𝑒
or simply

𝐹= 𝑃𝑒 -.

For classroom discussion only

Example 12:

Suppose you have invested ₱20,000 at 3%

compounded continuously. How much will
you have from this investment after 6
years?

For classroom discussion only

 Suppose you have invested ₱20,000 at 3% compounded continuously. How much will
Solution to#12: you have from this investment after 6 years?

Solving for the maturity value at

continuous compounding:
Given:
𝑃 = ₱ 20,000 " (!) !
𝐹 = 𝑃𝑒
𝑖 = 3% compounded
continuously 𝐹 = 20,000𝑒 #.#%(')
= 0.03
𝑡 = 6 years 𝐹 = ₱ 23, 944.35
Unknown: 𝐹

For classroom discussion only

Example 13:

Find the amount(maturity value) if

₱40,000 was invested for 10 years at 12%
converted (compounded) continuously.

For classroom discussion only

 Find the amount(maturity value) if ₱40,000 was invested for 10 years at
Solution to#13: 12% converted (compounded) continuously.

Solving for the maturity value at

Given: continuous compounding:
𝑃 = ₱ 40,000 " (!) !
𝑖 = 12% compounded 𝐹 = 𝑃𝑒
continuously
= 0.12
𝐹 = 40,000𝑒 #.)*()#)
𝑡 = 10 years
𝐹 = ₱ 132,804.68
Unknown: 𝐹

For classroom discussion only

COMPOUND
COMPOUNDINTEREST

“Compound Interest is
the eighth wonder of the
world. He who
understands it earns it…
he who doesn’t, pays it”
ALBERT EINSTEIN
For classroom discussion only
For Practice
1. Accumulate (means to find the maturity value) ₱3,000.00
"
for 9 years at 6% compounded quarterly.
#
Answer:

2. Find the compound amount if ₱ 25,000.00 is invested at

13% compounded quarterly for 12 years.
Answer: ₱
3. Find the compound interest if ₱ 5,000.00 is invested at
15% compounded monthly for 4 years.
Answer: ₱

4. Lara sells a frenchdoor inverter refrigerator to Josie at

installment basis. Josie pays ₱ 33,000.00 down
payment and owes a balance of ₱ 30,000.00 for 2
years. If money is worth 10% compounded monthly,
what is the cash value of the refrigerator?
Answer: ₱
5. Find the interest rate per period if money is invested at
10% compounded semi-annually for 3 years.
Answer:

6. How much must be invested today in a savings

account to realize ₱ 90,000.00 in 4 years if money
earns at the rate of 4% compounded quarterly?
Answer: ₱
7. If an entrepreneur applies for a loan amounting
to ₱ 500,000.00 in a bank, the compound interest
of which is ₱ 229,571.15 for 3 years, what interest rate
compounded semi-annually is being charged?
Answer:

8. On the birth of a son, a father wished to invest sufficient

money to accumulate to ₱ 1,000,000.00 by the time his
son turns 21 years old. If he invests at a rate of 12%
compounded semi-annually, how much should he put in?
Answer: ₱
9. Celine deposited ₱ 16,450 in her bank account that earns
8.25% interest compounded annually. How much was
added to her account at the end of 4 years and 6 months if
no additional deposits or withdrawals were made during
this period?
Answer: ₱

10. How long would it take for ₱ 1,968.23 to grow to

₱ 5,000.00 in a bank savings account at 12%
compounded semi-annually?
Answer:
11. When will it take for ₱ 5,000 to accumulate to
₱ 20,000.00 if invested at 15% compounded
quarterly?
Answer:

12. At what nominal rate compounded annually will

₱ 30,000 earns interest of ₱ 15,000 if it is invested for
5 years?
Answer:
13. Find the maturity value of ₱ 20,000 at the end of 2
years if the interest rate is 9% compounded
continuously.
Answer: ₱
"
14. ₱ 6,900 was invested for 4 years at 7 % compounded
$
continuously. Find the amount in 4 years.
Answer: ₱
15. Find the maturity value if ₱ 8,000 was invested for 6
years at 8% compounded continuously.
Answer: ₱