 COMPOUND INTEREST

 MATURITY (FUTURE) VALUE  COMPOUND INTEREST

F  P1  r 
t
Ic  F  P

where: F = maturity (future) value at the end of the term where: IC = compound interest
P = principal or present value F = maturity (future) value at the end of the term
r = interest rate P = principal or present value
t = time or term, in years

 PRESENT VALUE (P) at Compound Interest

F
 F1  r 
-t
P
1  r 
t

where: P = principal or present value

F = maturity (future) value at the end of the term
r = interest rate
t = time or term, in years

Examples:

1. Complete the table.

Principal (P) Rate (r) Time (t) Compound Interest (IC) Maturity Value (F)
a. 10, 000 8% 15
b. 3, 000 5% 6
c. 50, 000 10.5% 10
d. 2% 5 50, 000
e. 9.25% 2.5 100, 000

2. Find the maturity value and the compound interest if P10, 000 is compounded annually at an interest rate of
2% in 5 years.
3. Find the maturity value and interest if P50, 000 is invested at 5% compounded annually for 8 years.
4. What is the present value of P50, 000 due in 7 years if money is worth 10% compounded annually?
5. How much money should a student place in a time deposit in a bank that pays 1.1%compounded annually so
that he will have P200, 000 after 6 years?
6. What are the amounts of interest and maturity value of a loan for P20, 000 at 6% compound interest for 3
years?
7. In order to have P50, 000 in 5 years, how much should you invest if the compound interest is 5%?
8. A savings account in a bank yields 0.25% compound interest annually. Accumulate (find the future value of)
P25, 000 for 4 years in the savings account. How much interest will be gained?
9. In a certain bank, Angel invested P88, 000 in a time deposit that pays 0.5%compound interest in a year. How
much will be her money after 6 years? How much interest will she gain?
10. On the 7th birthday of her daughter, Shirley deposited an amount in a bank peso bond fund that pays 1%
interest compounded annually. How much should she deposit if she wants to have P100, 000 on her
daughter’s 18th birthday?

1
 COMPOUNDING MORE THAN ONCE A YEAR

Definition of Terms
 conversion or interest period – time between successive conversions of interest
 frequency of conversion (m) – number of conversion periods in one year
 nominal rate (im) – annual rate of interest
 rate (j) of interest for each conversion period
im annual rate of interest
j 
m frequency of conversion
 total number of conversion periods (n)
n = tm = (time in years) x 9frequency of conversion)

Examples of nominal rate and the corresponding frequencies of conversion and interest rate for each period
Im = nominal rate m = frequency j = interest rate per one conversion period
(Annual Interest Rate) of conversions conversion period
2% compounded annually; 0.02
1  0.02  2% 1 year
i1 = 0.02 1
2% compounded semi-annually; 0.02
2 2  0.01  1% 6 months
i = 0.02 2
2% compounded quarterly; 0.02
4  0.005  0.5% 3 months
i4 = 0.02 4
2% compounded monthly; 0.02
12  0.001 6  0.16% 1 month
i12 = 0.02 12
2% compounded daily; 0.02
365 365 1 day
i = 0.02 365

 MATURITY (FUTURE) VALUE, Compounding m times a year

mt
 im 
F  P1  j
n
F  P 1   or
 m 


where: F = maturity (future) value where: F = maturity (future) value

P = principal or present value P = principal or present value
im
im = nominal rate of interest (annual rate) j = interest rate per conversion period
m
m = frequency of conversion n = mt = total number of conversion periods
t = time or term, in years

2
  PRESENT VALUE (P) at Compound Interest

F
P mt
 m
1  i 
 m 


where: P = principal or present value

F = maturity (future) value
im = nominal rate of interest (annual rate)
m = frequency of conversion
t = time or term, in years

Examples:

1. Complete the table.

Nominal Interest Frequency of Interest rate per
Rate (im) Compounded conversion (m) conversion period
a. 12% Semi-annually
b. 16% Quarterly
c. 9% Monthly
d. Daily 0.03%
2. Complete the table.
Principal Nominal Interest Frequency Interest Time in Total Compound Maturity
Rate (im) Compounded of rate per years number of Interest Value
conversion conversion (t) conversions (IC) (F)
(m) period (n)
a. 10, 000 8% Semi- 15
annually
b. 3, 000 5% Quarterly 6 years
and 3
months
c. 12% Monthly 10 50, 000

3. Find the maturity value and interest if P10,000 is deposited in a bank at 2% compounded quarterly for 5
years.
4. Find the maturity value and interest if P10,000 is deposited in a bank at 2% compounded monthly for 5
years.
5. Cris borrows P50,000 and promises to pay the principal and interest at 12% compounded monthly. How
much must he repay after 6 years?
6. Find the present value of P50, 000 due in 4 years if money is invested at 12% compounded semi-annually.
7. What is the present value of P25, 000 due in 2 years and 6 months if money is worth 10% compounded
quarterly?
8. Accumulate P15, 000 for 2 years at 15% compounded monthly.
9. How much money should Kaye set aside and invest in a fund earning 2% compounded quarterly if she needs
P75, 000 in 15 months?
10. Peter is planning to invest P100,000. Bank A is offering 5% compounded semi-annually while Bank b is
offering 4.5% compounded monthly. If he plans to invest this amount for 5 years, in which bank should he
invest?

3
 FINDING INTEREST RATE and TIME IN COMPOUND INTEREST

Definition of Terms
 Equivalent rates – two annual rates with different conversion periods that will earn the same compound
amount at the end of a given number of years
 Nominal rate – annual interest rate (may be compounded more than once a year)
 Effective rate – the rate compounded annually that will give the same compound amount as a given nominal
rate; denoted by i1.

Examples:

1. How long will it take P3, 000 to accumulate to P3, 500 in a bank savings account at 0.25% compounded
monthly?
2. How long will it take P1, 000 to earn P300 if the interest is 12% compounded semi-annually?
3. At what nominal rate compounded semi-annually will P10, 000 accumulate to P15, 000 in 10 years?
4. At what interest rate compounded quarterly will money double itself in 10 years?
5. What effective rate is equivalent to 10% compounded quarterly?
6. Complete the table.
Interest Rate Equivalent Interest Rate
a. 12% compounded monthly _____% compounded annually
b. 8% compounded semi-annually _____% compounded quarterly
c. 12% compounded monthly _____% compounded semi-annually
7. Find the unknown.
a. F = 2, 000, P = 1, 750, m = 2, t = 4 years, j = ?, i m = ?
b. F = 100, 000, P = 10, 000, t = 8 years, money is compounded monthly, j = ?, i m = ?
c. F = 30, 000, P = 10, 000, im = 16% compounded quarterly, j = ?, n = ?, t = ?
d. F = 18, 000, P = 12, 000, im = 12% compounded semi-annually, j = ?, n = ?, t = ?
8. What is the nominal rate of interest if P4, 000 accumulate to P10, 000 in 8 years with interest compounded
quarterly?
9. At what nominal rate compounded semi-annually will P5, 000 amount to P6, 000 in 2 years?
10. What rate compounded annually will double an amount of money in 3 years?
11. In how many years will it take P18, 000 accumulate to P20, 000 when deposited in a savings account that
earns 0.250% compounded monthly?
12. How long will a principal double when invested at 10% compounded semi-annually?
13. At what annual interest rate compounded semi-annually will a certain amount triple itself in 20 years?
14. How much time is needed for money to triple itself in 20 years?
15. Nora borrowed an amount P40, 000 which she paid with an interest of P2, 000 at the end of 3 years? At
what nominal rate compounded semi-annually was it invested?