PRELIM

WEEK/MODULE- 3

COMPOUND INTEREST

Compound interest (or compounding interest) is the interest on a loan or deposit

calculated based on both the initial principal and the accumulated interest from previous
periods. Thought to have originated in 17th-century Italy, compound interest can be
thought of as "interest on interest," and will make a sum grow at a faster rate than simple
interest, which is calculated only on the principal amount.

Compound Interest is an interest which is based on the current account or on the

original capital plus the accumulated interest.

𝑭 = 𝑷(𝟏 + 𝒊)𝒏

where:
F= future amount
P= principal or capital or present worth
i= interest rate per period
n= total number of interest periods

Nominal Rate of Interest (NR)- is the basic annual rate of interest.

Nominal interest rate refers to the interest rate before taking inflation into account.

Nominal can also refer to the advertised or stated interest rate on a loan, without taking
into account any fees or compounding of interest.

𝑵𝑹
𝒊= ; 𝒏 = 𝒎𝑵
𝒎

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 Mode of Compound Interest m
Annually 1
Semi-annually 2
Quarterly 4
Semi-quarterly 8
Monthly 12
Semi-monthly 24
Bi-monthly 6

m= number of interest periods per year

n= number of years

EXAMPLE: If $10,000 is invested for 20 years at 6 percent, how much is the amount
accumulated when the interest is compounded semi-annually?

Solution:

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EXAMPLE: If $500 is invested now, $700 two years from now, and $900 four years
from now, all at 4%, what will be the total amount in 10 years?

Solution:

EXAMPLE: At an interest rate of 10% compounded annually, how much will deposit of
$1500 be in 15 years?

Solution:

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