M111:

Mathematics of
Investment
COMPOUND INTEREST

ENGR. FELISILDA || M111

RULES… rules…
Submission Guidelines.
Assignments should be submitted on or before the stipulated deadline at designated submission bins on the course site.
Do NOT submit assignments by email.

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10 DAYS AFTER DEADLINE (SCORE: 0)

Term Examinations
This is a 60-minute – 180-MINUTE ONLINE EXAM TAKEN ON SCheduled dates.
The exam time and venue will be announced a few weeks before the term exam.

Grading System
The range of grades is from 1.0 (Excellent) to 5.0 (Fail).
40 / 30 / 30 RULE
(CLASS STANDING (40%): QUIZZES/ ASSIGNMENTS;
MAJOR EXAM (30%) (GOOGLE FORM SHOW SOLUTION IF NEEDED);
PROJECT (30%): 10 SOLVED PROBLEMS PER TOPIC
(NOTEBOOK: 50 LEAVES, COVER BLACK, FIRST PAGE (FORMAT TO FOLLOW)

ENGR. FELISILDA || M111

HOUSE RULES
1. Download and print this course guide, read it carefully, and post it where you can readily refer to it. Do not ask the instructor a question that is
already answered or explained in the course guide.

2. Course activities will be conducted online. Log in to the course site daily or at least twice a week to keep abreast of important announcements,
discussions, and other class activities, including new readings, new learning activities, and new schedules.
Advance reading is encouraged.

3. Exercises and assignments shall be done independently and virtual classroom ethics must be observed. Students may discuss their work with
each other (for example in the discussion forums), but they should take full responsibility for the submission of their own output. Sources (enclose quoted
material in quotation marks) must be cited in using others’ idea (whether in the forums or in assignments). Be reminded that plagiarism can be grounds
for suspension and expulsion.

4. Schedule of course activities and deadlines must be followed and observed without exemption.
10 DAYS AFTER DEADLINE (SCORE: 0)

5. Active participation in all class discussions is encouraged.

a) English is the medium of instruction. Abbreviations and acronyms are not encouraged unless these are introduced in the readings.

b) Responses must be clear, concise and based on empirical evidence and course readings.

c) Privacy must be observed. “Ponder before you post”. Personal matters/transactions can be shared via email or private chat.

ENGR. FELISILDA || M111

OUTLINE:
SIMPLE INTEREST
COMPOUND INTEREST
SIMPLE DISCOUNT
ANNUITY CERTAIN
GENERAL ANNUITIES
DEBTS AND PERIODIC PAYMENTS
BONDS AND SECURITIES

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Chapter 1. Simple Interest and Simple Discount
Topic 1. Simple Interest
Topic 2. Exact and Ordinary Interest
Topic 3. Actual Time and Approximate Time
Topic 4. Simple Discount
Topic 5. Promissory and Discounting Notes

Chapter 2. Compound Interest

Topic 6. Interest Rate per Conversion Period
Topic 7. The Compound Amount and Compound Interest

Chapter 3. Annuity Certain

Topic 8. Annuity Immediate
Topic 9. Annuity Due

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 Chapter 4. General Annuities
Topic 10. Annuities Payable less Frequently than Interest is Convertible
Topic 11. Annuities More Frequently than Interest is Convertible
Topic 12. Continuous Annuities

Chapter 5. Debts and Periodic Payments

Topic 13. Amortization of Debt
Topic 14. Amortization Method
Topic 15. Sinking Fund Method

Chapter 6. Bonds and Securities

Topic 16. Basic Financial Securities
Topic 17. Bonds and Stocks
Topic 18. Premium and Discount
Topic 19. Yield between Interest Dates

ENGR. FELISILDA || M111

SESSION 1: COMPOUND
INTEREST
Objectives:
Compare and contrast compound interest and simple interest
apply the concept of compound interest in solving practical business-related problems

ENGR. FELISILDA || M111

REVIEW
SIMPLE INTEREST
I = Prt F = P + Prt F = P(1 + rt)

SIMPLE PRINCIPAL (P) INTEREST RATE INTEREST EARNED (I) FUTURE VALUE (F)
INTEREST (r)
YEAR 1 100 10% 10 110
YEAR 2 100 10% 10 120 = 100 + 10 + 10
YEAR 3 100 10% 10 130

ENGR. FELISILDA || M111

The Compound Interest
The word “compound” refers to the process of interest being reinvested to earn additional
interest. With compound interest the total investment of principal and interest earned to date is
kept invested at all times
Compound Amount (A) = [P(1 + i) n ] – P
A = P [(1 + i) n – 1]
Where:
P= principal amount
i = nominal interest rate in percentage
n = number of compounding periods = tm

ENGR. FELISILDA || M111

 Compound Amount (A) = [P(1 + i) n ] – P
A = P [(1 + i) n – 1]

PRINCIPAL INTEREST RATE INTEREST EARNED FUTURE VALUE

YEAR 1 100 10% 10 110
YEAR 2 110 10% 11 121
YEAR 3 121 10% 12.1 133.1

A = 100 (– 1 )
A = 21 (after 2 years) n = tm = 2(1)

ENGR. FELISILDA || M111

SIMPLE PRINCIPAL INTEREST RATE INTEREST EARNED FUTURE VALUE
INTEREST
YEAR 1 100 10% 10 110
YEAR 2 100 10% 10 120
YEAR 3 100 10% 10 130

Compound PRINCIPAL INTEREST RATE INTEREST EARNED FUTURE VALUE

interest
YEAR 1 100 10% 10 110
YEAR 2 110 10% 11 = Prt 121
YEAR 3 121 10% 12.1 133.1

ENGR. FELISILDA || M111

 Understanding the time value of money and the exponential growth created by compounding is essential for
investors looking to optimize their income and wealth allocation.
The formula for obtaining the future value (FV) and present value (PV) are as follows:
FV = P V (1 + i) n and PV = FV / (1 + i) n
i=j/m

= nominal rate
j

The formula for obtaining the future value (FV) and present value (PV) are as follows:

i=j/m (j - nominal rate, i – interest rate) n = tm

(t in years)
m = 2 if semi – annual

= 4 if quarterly

= 12 if monthly

ENGR. FELISILDA || M111

 Example #1
Example 1. Find the accumulated value of P2000 invested for four years if the rate of compound interest is 8%
per annum.
Given: P = P2000; n = 4 years; i = 8% per annum
Required: FV = accumulated value
Solution 1:
A = P [(1 + i) n – 1]
A = 2000 [(1 + 0.08) 4 – 1]
A = 720.98 pesos
FV = P + A
FV = 2000 + 720.98
FV = 2720.98 pesos

ENGR. FELISILDA || M111

Example #1
Example 1. Find the accumulated value of P2000 invested for four years if the rate of compound
interest is 8% per annum.

Solution 2:
FV = PV (1 + i) n
FV = 2000 (1 + 0.08) 4
FV = 2720.98 pesos

ENGR. FELISILDA || M111

Example #2
Example 2. Find the amount which must be invested at 9% per annum in order to accumulate
P1000 at the end of three years.
a) using simple interest b) using compound interest
Given: FV= 1000
i = 0.09 n = 3
Required: PV
Solution: b) 772.18 pesos a) 787.40 pesos

ENGR. FELISILDA || M111

Answer
Example 2. Find the amount which must be invested at 9% per
annum in order to accumulate P1000 at the end of three years.
a) using simple interest b) using compound interest
Given: i = 9% per annum; FV = 1000 pesos; Given: i = 9% per annum; FV = 1000 pesos;
n = 3 years n = 3 years
Required: P = principal amount Required: P = principal amount
Solution: PV = FV / (1 + i) n
PV = FV / (1 + r t) PV = 1000 / (1 + 0.09) 3
[from F = P(1 + rt)] PV = 1000 / 1.295
PV = 1000 / (1 + 0.09*3)
PV = 772.2 pesos
PV = 787.40 pesos

ENGR. FELISILDA || M111

Example#3
Amiel invested P120, 000 in a time deposit account at 7.5% compounded semi-annually. How
much is the value of the fund if it is withdrawn after 2 years and 3 months?
Given: PV – 120, 000
i = .075 =
n = 2.25(2) = 4.5 = tm = (2.25)(2)
answer:

ENGR. FELISILDA || M111

Example #3
Amiel invested P120, 000 in a time deposit account at 7.5% compounded semi-annually. How much is
the value of the fund if it is withdrawn after 2 years and 3 months?
Given:
P = 120, 000 j = 0.075
m = 2 (semi –annual) t = 2 years and 3 months
Solution:
FV = PV (1 + i) n i = j/m = 0.075 / 2 = 0.0375

n = tm = 2.25(2) = 4.5
FV = 120, 000 (1 + 0.0375) 4.5
FV = 141, 621.02 pesos

ENGR. FELISILDA || M111

Nominal, Effective and
Equivalent Rates
Two rates are considered equivalent if they will have the same accumulated value over the same
period of time.
For every nominal rate (j), rate is converted semi-annually, quarterly or monthly, there is a
corresponding effective rate (w, converted annually)
for every nominal rate , there is a corresponding equivalent nominal rate .

ENGR. FELISILDA || M111

formula:
w = (effective rate)
j = ] (nominal rate)
=

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Example #4 Find the equivalent effective rate for a nominal rate of 9.5% compounded monthly.
Given: j = 0.095 m = 12
Required: w – equivalent rate
Solution:
w=
w=
w = 9.90%

ENGR. FELISILDA || M111

As the number of compounding periods increases, so does the effective annual interest rate.
Below is a breakdown of these different compound periods with a 10% nominal interest rate
Effective Annual Interest Rate
Semi-annual = 10.250%
Quarterly = 10.381%
Monthly = 10.471%
Daily = 10.516%

ENGR. FELISILDA || M111

THANK YOU!

ENGR. FELISILDA || M111