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Varying Interest
If the interest rate changes during an investment term, the amount of the previous rate is first
obtained before applying the new rate. (source: Mathematics of Investment by Ong and San Gabriel page
51)
Sample Problems
1. Find the amount in 15 years if P50,000 is invested at 18% compounded semi-annually in the
first 4 years, 15% compounded semi-annually in the next 5 years and 18% compounded
quarterly in the last 6 years?
Given:
P = 50,000
j = 18% or .18
m = semi-annually or 2
i = j/m or .18/2 = .09
t = 4 years
n = tm or 4 x 2 = 8
j = 15% or .15
m = semi-annually or 2
i = jm or .15/2 = .075
t = 5 years
n = tm or 5 x 2 = 10
j = 18% or .18
m = quarterly or 4
i = j/m or .18/4 = .045
t = 6 years
n = tm or 6 x 4 = 24
Solution
F = P(1 + i)n
F = P(1 + i)n (1 + i)n (1 + i)n
F = 50,000 (1 + .09)8 (1 + .075)10 (1 + .045)24
F = 50,000 (1.992562642) (2.061031562) (2.876013834)
F = 590,551.26
2. Jerome deposits P400,000 in a bank that gives 9% interest converted quarterly. How much
money would he have in 9 years and 3 months, if the interest rate increased to 10% converted
quarterly 5 years later?
Given:
P = 400,000
j = 9% or .09
m = quarterly or 4
i = j/m or .09/4 = .0225
t = 5 years
n = tm or 4x4 = 20
j = 10% or .10
m = quarterly or 4
i = j/m or .10/4 = .025
t = 4 years and 3 months or 4.25 years
n = tm or 4.25 x 4 = 17
Solution
F = P(1 + i)n
F = P(1 + i)n (1 + i)n
F = 400,000 (1 + .0225)20 (1 + .025)17
F = 400,000 (1.560509201) (1.521618261)
F = 949,799.71
Continuous Compounding
Interest may also be converted very frequently like weekly, daily or hourly. Interest converted
vey frequently is referred to as being converted continuously.
Formula
F = Pejt
P = Fe-jt
Note: the symbol “e” is constant and can be found in your scientific calculator.
Sample problems
1. Find the amount if P440,000 were invested for 10 years at 10% converted continuously.
Given:
P = 440,000
j = 10% or .10
t = 10 years
Solution
F = Pejt
F = 440,000 e.10 x 10
F = 440,000 e1
F = 440,000 (2.718281828)
F = 1,196,044.01
2. Find the present value of P580,000 due in 8 years at 9% compounded continuously.
Given:
P = 580,000
j = 9% or .09
t = 8 years
Solution:
P = Fe-jt
P = 580,000 e-.09 x 8
P = 580,000 e-.72
P = 580,000 (.486752256)
P = 282,316.31