Module No. 2: Compound Interst

module no.
2
COMPOUND INTERST
MATHEMATICS OF
MS CARMENCITA T. ANDRES FIRST SEMESTER SY 2020 - 2021
INVESTMENT
DR. RUBY LANTING CASAUL EDUCATIONAL FOUNDATION INC.
Tomas Cabiles Street, San Juan Tabaco City
Tel No: 052-431-3783
Email add: casual.lanting.college@gmail.com
SUBJECT: MATHEMATICS OF INVESTMENT

BSED 2 MATHEMATICS
1:00 – 2:30 MONDAY
Module No. 2
CHAPTER 2
COMPOUND INTEREST
A. INTRODUCTION
Compound Interest is the interest added to the principal at the end
of a certain period of time after which the interest is computed on the new
principal, and this process is repeated until the end of the term of loan is
reached. In this lesson, we shall dwell mainly on simple interest. Study the
illustration below.
B. LEARNING OUTCOMES:
At the end of this module, you should be able to –
 Compare Simple Interest with Compound Interest
 Solve problems involving Compound Interest with emphasis on the
conditions and what formulas will be used
1
Tel No: 052-431-3783
C. LEARNING EXPERIENCES AND SELF-ASSESSMENT ACTIVITIES

Compound interest is the addition of interest to the principal sum
of a loan or deposit, or in other words, interest on interest. It is the result
of reinvesting interest, rather than paying it out, so that interest in the next
period is then earned on the principal sum plus previously
accumulated interest.
Compound interest - Wikipedia
The following figures will help you easily understand the comparison
between simple interest with compound interest. Study the content and
illustrations for your reference.
2
Tel No: 052-431-3783
Compound Interest is the interest resulting from the periodic addition

of simple interest to the principal. This new sum is used as the new principal
for a certain number of periods, the resulting value is called final or compound
amount and is designated as F.
The time between successive interest computations is called
compounding or conversion period.
The number of conversion periods for one year is denoted by m, while
the total number of conversion periods for the whole investment term is
denoted by n. Conversion periods are usually expressed by any convenient
length of time, and usually taken as exact division of the year, such as
monthly, quarterly, semi-annually, and annually.
When the conversion periods are: Thus, the term 5 yrs. compounded
Annually m=1 5x1=5 n=5
Semi-annually m=2 5 x 2 = 10 n = 10
Quarterly m=4 5 x 4 = 20 n = 20
Monthly m = 12 5 x 12 = 60 n = 60
The interest rate r is usually expressed as an annual or yearly rate, and must
be changed to the interest rate per conversion period or periodic rate I and
can be found from the relation:
Interest rate per year
i=
conversion period per year m
r
i=
m
Thus, the interest rate at 5% compounded:
Annually m=1 5÷1=5 i = 5%
Semi-annually m=2 5÷2=2½ i= 2 ½ %
Quarterly m=4 5÷4=1¼ i=1¼%
Monthly m = 12 5 ÷12 = 5/12 i= 5/12 %
3
Tel No: 052-431-3783
Illustrations:
Given: P = ₱800 I=? rate (r) = 6%
Simple Interest
Original Principal ₱800.00
Interest for the 1st yr (800 x 0.06)=48
Interest for the 2nd yr (800 x 0.06)=48
Interest for the 3rd yr (800 x 0.06)=48
Amount at the end of 3 yrs 800 + (48x3) = ₱944
Total Interest for 3 yrs (48x3) = ₱ 144
Given: P = ₱800 I = ? rate (r) = 6%

Compounded semi-annually = m = 2
r
For compound interest use the formula i= to obtain the value of i.
m
0.06
i= =0.03
2
COMPOUND INTEREST
Original Principal ₱800.00
Interest for the 1st 6 months 800 x .03 = 24.00
Principal at the end of the 1st 6 months 800 +24 = 824.00
Interest for the 2nd 6 months 824 x 0.03 = 24.72
Principal at the end of the 2nd 6 months 824+24.72 = 848.72
Interest for the 3rd 6 months 848.72 x .03 = 25.46
Principal at the end of the 3rd 6 months 848.72 + 25.46 = 874.18
Interest for the 4th 6 months 874.18 x .03 = 26.23
Principal at the end of the 4th 6 months 874.18 + 26.23 = 900.41
Interest for the 5th 6 months 900.41 x 0.03 = 27.01
Principal at the end of the 5th 6 months 900.41 + 27.01 = 927.42
Interest for the last 6 months 927.42 x 0.03 = 27.82
Amount at the end of 3 years 927.42 + 27.82 = ₱955.24
Total Compound Interest for 3 yrs 955.24 – 800 = ₱155.24
These computations show that the compound interest of ₱155.24 is more than
the simple interest of ₱ 144.00 by ₱ 11.24.
The above computation for compound interest could be time consuming so we use
the following formulas F=P(1+i)n and I = F – P
Where: F = Final or compound amount

P = Original Principal
4
Tel No: 052-431-3783
r
i = periodic rate (i= )
m
n = total number of conversions (n = t x m)
I = compound Interest
Using the formula to the same given problem, we obtain
F=P(1+i)n
F=800(1+ 0.03)3 x2
F = 800(1.03)6 = ₱955.24 I = ₱955.24 – 800 = ₱155.24
SELF ASSESSMENT ACTIVITY 1

Solve each problem following the examples given above:
1. Find the compound amount and interest if ₱5,500 is invested at
8% compounded quarterly for 5 years and 6 months.
P = ₱5,500 r = 8% m=4 t = 5 yrs. and 6 months
2. Find the compound amount and interest on ₱12,800 for 3 years
and 4 months at 6% converted quarterly.
3. Accumulate ₱12,000 for 27 years and 9 months at 11%
compounded quarterly.
4. Accumulate ₱19,500 for 19 years and 9 months at 9%
compounded monthly.
5. Find the value of (1 + 5%)155
5
Tel No: 052-431-3783
SELF EVALUATION
Using the scale below, rate the extent of your learning in this module. Check
the appropriate column that corresponds to your rating. (Please do not
hesitate to write your true feelings. I am always here to assist you.)
I am an expert. I understand and can teach a friend about it.
I am a practitioner. I understand and can cite examples on the topics given
I am an apprentice. I understand if I get help or read more about the topic
I am a novice. I did not understand the topic
MY LEARNINGS
6
Tel No: 052-431-3783
MODULE EVALUATION
Now is your turn to evaluate this module that I have prepared for you. The
scale is specified below. Check on the appropriate column that corresponds to
your evaluation.
Strongly Agree
Agree
Disagree
Strongly Disagree
This module
Tends to draw favorable attention or interest
Allows self-checking (SAA’s)
Developed content in gradual, manageable steps
Provides independent, self-paced learning
Provided relevant information

Module No. 2: Compound Interst

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module No. 2: Compound Interst

Uploaded by

Copyright:

Available Formats

module no.

SUBJECT: MATHEMATICS OF INVESTMENT

C. LEARNING EXPERIENCES AND SELF-ASSESSMENT ACTIVITIES

Compound Interest is the interest resulting from the periodic addition

Given: P = ₱800 I = ? rate (r) = 6%

Where: F = Final or compound amount

SELF ASSESSMENT ACTIVITY 1

I am an expert. I understand and can teach a friend about it.

I am a practitioner. I understand and can cite examples on the topics given

I am an apprentice. I understand if I get help or read more about the topic

I am a novice. I did not understand the topic

Tends to draw favorable attention or interest

Allows self-checking (SAA’s)

Developed content in gradual, manageable steps

Provides independent, self-paced learning

Provided relevant information

You might also like