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4.2 Compound

The document discusses compound interest, which is interest earned on both the principal amount and accumulated past interest. It defines key terms like principal, interest rate, interest, maturity value, time period, and frequency of compounding. It presents two methods for computing compound interest - direct method and compound interest formula. Examples are provided to demonstrate calculating compound interest for different time periods and interest rates compounded annually, semi-annually, quarterly, and monthly.

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Szchel Eariel Villarin
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256 views18 pages

4.2 Compound

The document discusses compound interest, which is interest earned on both the principal amount and accumulated past interest. It defines key terms like principal, interest rate, interest, maturity value, time period, and frequency of compounding. It presents two methods for computing compound interest - direct method and compound interest formula. Examples are provided to demonstrate calculating compound interest for different time periods and interest rates compounded annually, semi-annually, quarterly, and monthly.

Uploaded by

Szchel Eariel Villarin
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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Chapter 4.

2
Exploring
Compound
Interest
Compound Interest
- interest computed on the
principal and also on the
accumulated past interests
Principal (P)
- amount of money
borrowed or invested on the
original date
Rate (r)
- annual rate, usually in
percent, charged by the
lender, or rate of increase of
the investment
Interest (I)
- amount paid or earned for
the use of money
Maturity Value/Final Amount
- amount after t years that the
lender receives from the
borrower on the maturity
date
time or term (t)
- amount of time in years
the money is borrowed or
invested; length of time
between the origin and
maturity dates
Interest may be compounded
annually, semi-annually,
quarterly or monthly
2 Methods in Computing
Compound Interest
1. Direct Method
F= P(1 + rt)
2. Compound Interest
Formula
F= P (1 + i )ⁿ
F = final amount
P = principal/original amount
i = rate of interest for each
conversion period
i = r_
m
r = nominal rate of
interest/annual interest
rate
m = frequency of conversion
periods in one year
n = total number of
conversion periods m(t)
t = number of years
Frequency of Value of m
Conversion
annually m=1
semi-annually m=2
quarterly m=4
monthly m=12
Examples:
1. Find the maturity value
and the compound
interest if 10,000 is
compounded annually
at an interest rate of 2%
in 5 years?
2. Find the maturity
value and interest if
50,000 is invested at
5% compounded
annually for 8 years?
3. Mr. Ocampo invested
150,000 at 10%
compounded annually. He
plans to get this amount
after 6 years for his son’s
college education. How
much will he get?
Solve:
1. What is the interest of 25,000 if
invested at 4.5% compounded
annually in 3 years and 2
months?
2. Mr. Bautista aims to have his
investment grow to 500,000 in 4
years. How much should he
invest in an account that pays
5% compounded annually?
Finding the time in a
Compound Interest
n
t 
m
where: F
log
n P
log( 1  i )
Rose makes an investment
worth P15000 in a savings
bank paying 14%
compounded monthly. If she
withdraws all her investments
and the interest which
amounts to P19450, for how
long did she invest her
money?
Finding the Nominal Rate (r)
in a Compound Interest
r  im
F
where in 1
P
1
F
i  ( ) 1
n
P
At what rate compounded
quarterly will P14000
become P16500 for three
years?

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