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Compound Interest

The document discusses compound interest, which is interest earned on interest. It provides formulas to calculate maturity value, compound interest, and present value given the principal, interest rate, and time. Examples are provided to demonstrate calculating maturity value when principal is compounded annually. The key concepts are that maturity value is calculated as principal multiplied by (1 plus the interest rate) raised to the power of the number of years, and compound interest is calculated as maturity value minus principal.

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Allaine Benitez
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43 views13 pages

Compound Interest

The document discusses compound interest, which is interest earned on interest. It provides formulas to calculate maturity value, compound interest, and present value given the principal, interest rate, and time. Examples are provided to demonstrate calculating maturity value when principal is compounded annually. The key concepts are that maturity value is calculated as principal multiplied by (1 plus the interest rate) raised to the power of the number of years, and compound interest is calculated as maturity value minus principal.

Uploaded by

Allaine Benitez
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

LESSON: 25 COMPOUND INTEREST


•OBJECTIVES•

• • Compute Interest , maturity value, and Present value in


compound interest and solve problems involving
compound interest.
MATURITY (FUTURE) VALUE AND COMPOUND INTEREST

Where F = P(1+r)^t
P= Principal or Present Value
F= maturity value (future) value at the end of a term
r= interest rate
t= term or times of years
The Compound Interest Ic = F – P
EXAMPLE 1. FIND THE MATURITY VALUE AND THE COMPOUND
INTEREST IF P10,000 IS COMPOUNDED ANNUALLY

AT AN INTEREST RATE OF 2% IN 5 YEARS


Given:
P = 10,000
r = 2% = 0.02
t= 5 years
Solution:
(a) F= P(1+r)^t
F (10,000) (1+0.02)^5
F= 11,040.81
(b) Ic = F – P
Ic= 11040.81 – 10000
Ic= 1040.81
FIND THE MATURITY VALUE AND INTEREST IF £50,000 IS
INVESTED AT 5% COMPOUNDED ANUALLY FOR 8 YEARS

• GIVEN:

P = 50,000
r= 5% = 0.05
t= 8 years
F= (50,000)(1+0.05)^8
F=73,872.77
Ic= ( 73,872.77-50,000)
Ic=23,872.77
WHAT IS THE PRESENT VALUE OF 50,000 DUE IN 7 YEARS IF MONEY
IS WORTH 10% COMPOUNDED ANNUALLY

• Given: F= 50,000
R= 10%= 0.1
T = 7 years
WHAT IS THE PRESENT VALUE OF $50,000 DUE IN 7 YEARS IF THE MONEY IS WORTH
10% COMPOUNDED ANNUALLY.

• Given:
P= $50,000 , r= 10%= 0.1 , t= 7 years
Find the present value
Principal Value Rate Time Compound Maturity Value (F)
(P) Interest (Ic)
10,000 8% 15 (2) (1)

3,000 5% 6 (4) (3)

50,000 10.5% 10 (6) (5)

(7) 2% 5 (8) 50,000

(9) 9.25% 2.5 (10) 100,000


First find the Maturity Value
1.) F= 10,000(1+0.08)^15
= 10,000(3.172169114)
F= 31,721.69
2.) Ic= 31,721.69 -10,000
= 21,721.69
Compund Interest.
3.) F= 3,000(1+0.05)^6
= 3,000 (1.340095641)
F = 4,020.29
4.) Ic= 4,020.29-3,000
Ic= 1,020.29

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