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Compoun Interest Lesson

Here are the solutions to the activity: (1) ₱27,893.20 (2) ₱37,893.20 (3) ₱1,620 (4) ₱4,620 (5) ₱163,103.50 (6) ₱213,103.50 (7) ₱1,260 (8) ₱21,260 (9) ₱25,250 (10) ₱25,250

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48 views6 pages

Compoun Interest Lesson

Here are the solutions to the activity: (1) ₱27,893.20 (2) ₱37,893.20 (3) ₱1,620 (4) ₱4,620 (5) ₱163,103.50 (6) ₱213,103.50 (7) ₱1,260 (8) ₱21,260 (9) ₱25,250 (10) ₱25,250

Uploaded by

sonamaegarcia23
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

Many bank savings accounts pay compound interest. In this case, the interest is added to
the account at regular intervals, and the sum becomes the new basis for computing interest.
Thus, the interest earned a certain time interval is automatically reinvested to yield more
interest.
The following table shows the amount at the end of each year if principal P is invested at
an annual interest rate r compounded annually. Computations for the particular example P
– ₱100,000 and r = 5% are also included.
Year (t) Principal – P Principal – ₱100,000
Int. rate – r, compounded annually Int. rate – 5%, compounded annually

Amount at the end of the year Amount at the end of the year

1 P(1+r) = P(1+r) 100,000,1.05 = 105,000


2 P(1+r)(1+r) = P(1+r)2 105,000,105 = 110,250
3 P(1+r)2(1+r) = P(1+r)3 110,250,1.05 = 121,550.63
4 P(1+r)3(1+r) = P(1+r)4 121,550.63,1.05 = 127,628.16
Observe that the amount at the end of each year is just the amount from the previous year
multiplied by (1 + r). In other words, 1 + r is multiplied each time the year ends. This
results in the following for the amount t years, given an annual interest rate of r:
Maturity (Future) Value and Compound Interest
F = P(1 + r)t
where
P = principal or present value
F = Maturity (future) value at the end of the term
r = interest rate
t = term/time in years
Compound Interest
The compound interest Ic is given by

Ic = F – P
EXAMPLE 1. Find the maturity value and the compound interest if
₱10,000 is compounded annually at an interest of 2% in 5 years.
Solution: Given: P = 10,000 r = 2% or 0.02 t = 5 years
Find: (a) maturity value F (b) compound interest Ic
(a)F = P(1 + r)t = (10,000)(1 + 0.02)5 = 11,040.081
(b)Ic = F – P = 11,040.81 – 10,000 = 1,040.81

REMEMBER:
The formula to get the Maturity Value is F = P(1 + r)t and the
formula to get the Compound Interest is Ic = F – P.
Example 2. Find the maturity value and interest if ₱50,000 is invested at 5%
compounded annually for 8 years.

Solution. Given: P = 50,000 r = 5% or 0.05 t = 8 years


Find: (a) maturity value F (b) compound interest Ic

(a)F = P(1 + r)t = (50,000)(1 + 0.05)8 = 73,872.77


(b)Ic = F – P = 73,872.77 – 50,000 = 23,872.77

Answer: The maturity value F is ₱73,872.77 and the compound interest is


₱23,872.77.
Example 3. Suppose your father deposited in your bank account ₱10,000 at an
annual interest rate of 0.5% compounded yearly when you graduate from
kindergarten and did not get the amount until you finish Grade 12. How much
will you have in your bank account after 12 years?

Solution. Given: P = 10,000 r = 0.5% or 0.005 t = 12 years


Find: F
(a)F = P(1 + r)t = (10,000)(1 + 0.005)12 = 10,616.78

Answer: The amount will become ₱10,616.78 after 12 years.


Activity: Complete the table by finding the unknown Compound Interest Ic and
Maturity Value F.
Principal Rate (r) Time (t) Compound Interest (Ic) Maturity Value (F)
P
10,000 8% 15 (1) (2)

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

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

20,000 6% 3 (7) (8)

25,000 0.25% 4 (9) (10)

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