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Compound Interest

Compound interest is interest calculated on the initial principal amount and also on the accumulated interest from previous periods. It allows interest to grow exponentially over time. The document defines key terms related to compound interest such as compound amount, interest rate, interest period, and accumulation factor. It provides formulas for calculating the compound amount, interest, present value, interest rate, and time taken for an investment to grow at compound interest.

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RannValle
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356 views12 pages

Compound Interest

Compound interest is interest calculated on the initial principal amount and also on the accumulated interest from previous periods. It allows interest to grow exponentially over time. The document defines key terms related to compound interest such as compound amount, interest rate, interest period, and accumulation factor. It provides formulas for calculating the compound amount, interest, present value, interest rate, and time taken for an investment to grow at compound interest.

Uploaded by

RannValle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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COMPOUND INTEREST

• COMPOUND AMOUNT – (future


value) is the final amount of the
investment or loan at the end of
the term or last period.
• COMPOUND INTEREST – is the
difference between compound
amount and the original principal
Number of
interest/
Interest compounded
compounding
periods in 1 year
Annually or once a year 1
Semi-annually or every 6 2
months
Quarterly or every 3 4
months
Monthly or once a month 12
Daily or once a day 365/366 (leap
year)
TERMS:
• CONVERSION PERIOD OR INTEREST PERIOD – this is the
time between two successive conversions of interest
• FREQUENCEY OF CONVERSION – this is the number of
conversion periods of the investment or loan per year.
• NOMINAL RATE – this is the stated rate of interest per
year
• RATE PER CONVERSION PERIOD – this is the rate of
interest for each conversion period
• NUMBER OF CONVERSION PERIOD – this is the total
number of times interest is calculated for the entire
term of the investment or loan.
• (1+ i) n – accumulation factor for compound interest
Symbols DEFINITION
P ORIGINAL PRINCIPAL
COMPOUND AMOUNT OR MATURITY
M VALUE OR accumulated value pf P at end of
n periods.
m FREQUENCEY OF CONVERSION
j NOMINAL RATE
𝑗
i RATE PER CONVERSION PERIOD
𝑚

t TERM OF INVESTMENT OR LOAN IN YEARS


n NUMBER OF CONVERSION PERIOD (t x m)
FINDING THE COMPOUND AMOUNT
AND INTEREST
• FORMULA:
𝑗 𝑛
M=P 1+ or M= P(1+ i)n
𝑚

And I =M – P
EXAMPLES:
A. Find the compound amount and compound
interest on:
1. ₱10,000.00 for 5 years at 6% compounded
annually
2. ₱ 15,250.00 for 4 years and 6 months at 8%
compounded semi-annually
B. Find the maturity value and compound
interest of an investment of ₱ 65,000.00 that is
placed in a savings fund that pays 5.75%
compounded quarterly for 4 years and 6
months.
FINDING THE PRESENT VALUE
• FORMULA P = M(1+i)-n
Example:
Find the present value of:
1. ₱ 12,850.00 due in 3 years if the
interest rate is 8% compounded
quarterly
2. ₱49,250.45 due in 5 years and 5
months. If money is worth
2
6 % compounded monthly.
5
3. How much must be invested today
in a savings account in order to have
₱50,800.00 in 6 years and 9 months. If
the money ears 8 ½ % compounded
quarterly?
Finding the rate of interest
1
𝑀 𝑛
Formula: 𝑗=𝑚 − 1 𝑥 100
𝑃
Example:
1. At what rate of interest compounded annually
will ₱60,000.00 accumulate to ₱70,000.00 in 2
years?
2. Find the nominal rate of interest compounded
quarterly at which ₱40,000.00 accumulates to
₱60,000.00 in 7 years.
3. At what rate compounded quarterly will
₱25,000.00 accumulate to ₱26,995.47 in 2 years
Find the time
𝑀
𝑙𝑜𝑔
• Formula: 𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠 = 𝑃
÷m
log(1+𝑖)

• Examples:
1. How many years will it take for ₱13,000.00 to
become ₱20,000.00. if it is invested at 8%
compounded quarterly?
2. How long in years will it take for ₱25,000.00
to earn an interest of ₱10,000.00 if it is
invested at 6% compounded monthly?
3. How many years will it take
₱80,000.00 to earn ₱60,000.00 if the
interest rate is 6% compounded
monthly?

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