General Mathematics

Quarter 2 – Weeks 5 to 6
Compound Interests

INSTRUCTIONS:
Answer the following:
✓ What’s More
✓ What I Can Do

Show your SOLUTIONS clearly.

 Lesson
Compound Interest
5

What I Need to Know

At the end of the lesson, the learners should be able to:

1. define compound interest;
2. compute compound interest, maturity value and present value;
3. differentiate simple from compound interest; and
4. solve problems involving compound interest.

What’s In

Problems involving simple interest were discussed on the previous lesson. Simple
interest is the interest charged on the principal alone for the entire length of the loan or
investment. Several formulas were introduced to solve problems involving simple interest. The
second type of interest that will be discussed on this lesson is the compound interest. For many
long-term financial transactions, compound interest is used instead of simple interest.

What’s New

“Suppose you won ₱10,000.00 and you plan to invest if for 5 years. A cooperative
group offers 2% simple interest rate per year. A bank offers 2% compounded annually. Which
will you choose and why?”

Definition of terms:

Compound amount (F) – also called maturity value, it is an accumulated amount obtained by
adding the principal and the compound interest.

Conversion period (m) – the number of times in a year the interest will be compounded.
The following are the common conversion periods in a year:
annually : m=1
semi-annually : m=2
quarterly : m=4
monthly : m = 12

1
Number of conversion periods (n) – the total number of times interest is calculated for the
entire term of the investment or loan.

Annual interest rate or nominal rate (r) – the stated rate of interest per year.

Periodic rate (i) – the interest rate per conversion period.

Present value of F (P) – this is the principal P, that will accumulate to F if there is an interest
at periodic rate i for n conversion periods.

What is It

Compound Interest (Ic)

Compound interest (Ic) is usually used by banks in calculating interest for long-term
investments and loans such as savings account and time deposits. In this type of interest, the
interest due at stipulated interval is added to the principal and earns interest thereafter. It implies
that the principal increases over a period of time, resulting to an increase in interest earned at
every compounding period. Thus, compound interest is an interest resulting from the periodic
addition of simple interest to the principal amount or simply the difference between the
compound amount and the original principal.

The problem below is an example of compound interest.

Example:

₱50,000.00 was loaned for a period of 3 years with 5% interest compounded annually.
What amount of money will be needed to repay the loan?

Principal at
Amount at the end of the
the start of Interest
year
the year

₱50,000 + 2 500 =
First Year ₱50,000.00 ₱50,000 × 0.05 × 1 = ₱2,500.00
₱52,500.00

₱52,500 + 2625 =
Second Year ₱52,500.00 ₱52,500 × 0.05 × 1 = ₱2,625.00
₱55,125.00

₱55,125 + 2 756.25 =
Third Year ₱55,125.00 ₱55,125 × 0.05 × 1 = ₱2,756.25
₱57,881.25

The required answer to the problem is ₱57,881.25.

2
 As shown in the table, the amount at the end of the year is equal to the sum of the
principal and the interest for that year.

Thus,

Amount for First Year: A = 50000 + (50000 × 0.05)

= 50000 (1 + 0.05)

Amount for Second Year: A = 50000 (1 + 0.05) + (50000 (1 + 0.05)(0.05))

= 50000 (1 + 0.05) (1 + 0.05)
= 50000 ( 1 + 0.05)2

Amount for Third Year: A = 50000 (1 + 0.05)2 + (50000 ( 1 + 0.05)2(0.05))

= 50000 (1 + 0.05)2 (1 + 0.05)
= 50000 (1 + 0.05)3

Generally, when interest is compounded annually for n years, the amount A = P( 1 + i) n.

Computation of the compound amount by the method shown above is tedious and time-
consuming. The formulas below will greatly ease computations.

Formulas:
𝒓 𝒎𝒕
• 𝑭 = 𝑷(𝟏 + 𝒊)𝒏 or 𝑭 = 𝑷 (𝟏 + )
𝒎

𝒓 −𝒎𝒕
• 𝑷 = 𝑭(𝟏 + 𝒊)−𝒏 or 𝑷 = 𝑭 (𝟏 + )
𝒎

𝑰𝒄 = 𝑭 − 𝑷 or
𝑰𝒄 = 𝑷[(𝟏 + 𝒊)𝒏 − 𝟏]
𝟏
𝑭 𝒏
• 𝒓= 𝒎 [( ) − 𝟏]
𝑷

𝑭
𝐥𝐨𝐠( )
• 𝒕= 𝑷
𝒎[𝐥𝐨𝐠(𝟏+𝒊)]

***where
𝐼𝑐 − compound interest
𝑃 − present value of F
𝑟 − annual interest rate
𝑡 − time (per year)
𝐹 − compound amount or maturity value
𝑚 − conversion period
annually : m=1
semi-annually : m=2
quarterly : m=4

3
 monthly : m = 12
𝑛 − total number of conversion periods (𝑛 = 𝑚𝑡)
𝑟
𝑖 − periodic rate (𝑖 = 𝑚)
Examples:
1.) Find the compound amount and interest earned on ₱15,000.00 for 1 year at
(a) 7% compounded semi-annually and
(b) 7% compounded quarterly.

Solution:

(a) Given: P = ₱15,000.00 t = 1 year

r = 7% or 0.07 m=2

𝑟 0.07
𝑖= = = 0.035 𝑛 = 𝑚𝑡 = 2(1) = 2
𝑚 2

𝐹 = 𝑃 (1 + 𝑖 ) 𝑛 𝐼𝑐 = 𝐹 − 𝑃
𝐹 = ₱15,000.00(1 + 0.035 )2 𝐼𝑐 = ₱16,068.38 − ₱15,000.00
𝑭 = ₱𝟏𝟔, 𝟎𝟔𝟖. 𝟑𝟖 𝑰𝒄 = ₱𝟏, 𝟎𝟔𝟖. 𝟑𝟖

Therefore, the compound amount and the interest are ₱16,068.38 and ₱1,068.38,
respectively.

Alternative solution for solving the compound interest:

𝐼𝑐 = 𝑃[(1 + 𝑖 )𝑛 − 1]
𝐼𝑐 = ₱15,000.00[(1 + 0.035)2 − 1]
𝑰𝒄 = ₱𝟏, 𝟎𝟔𝟖. 𝟑𝟖

(b) Given: P = ₱15,000.00 t = 1 year

r = 7% or 0.07 m=4

𝑟 0.07
𝑖= = = 0.0175 𝑛 = 𝑚𝑡 = 4(1) = 4
𝑚 4

𝐹 = 𝑃 (1 + 𝑖 ) 𝑛 𝐼𝑐 = 𝐹 − 𝑃
𝐹 = ₱15,000.00(1 + 0.0175 )4 𝐼𝑐 = ₱16,077.89 − ₱15,000.00
𝑭 = ₱𝟏𝟔, 𝟎𝟕𝟕. 𝟖𝟗 𝑰𝒄 = ₱𝟏, 𝟎𝟕𝟕. 𝟖𝟗

Therefore, the compound amount and the interest are ₱16,077.89 and ₱1,077.89,
respectively.

Alternative solution for solving the compound interest:

𝐼𝑐 = 𝑃[(1 + 𝑖 )𝑛 − 1]

4
 𝐼𝑐 = ₱15,000.00[(1 + 0.0175 )4 − 1]
𝑰𝒄 = ₱𝟏, 𝟎𝟕𝟕. 𝟖𝟗
2.) Find the present value of ₱12,850.00 due in 3 years if the interest rate is 6%
compounded monthly.

Solution:

(a) Given: F = ₱12,850.00 t = 3 years

r = 6% or 0.06 m = 12

𝑟 0.06
𝑖=𝑚= = 0.005 𝑛 = 𝑚𝑡 = 12(3) = 36
12

𝑃 = 𝐹 (1 + 𝑖 )−𝑛
𝑃 = ₱12,850.00(1 + 0.005)−36
𝑷 = ₱𝟏𝟎, 𝟕𝟑𝟖. 𝟎𝟒

Therefore, the present value is ₱10,738.04.

3.) At what rate of interest compounded semi-annually will ₱14,300.00 accumulate to

₱17,000.00 in 2 years and 6 months?

Solution:

Given: P = ₱14,300.00 m=2

6
F = ₱17,000.00 t = 2 12 years or 2.5 years
𝑛 = 𝑚𝑡 = 2(2.5) = 5

1
𝐹 𝑛
𝑟 = 𝑚 [( ) − 1]
𝑃
1
₱17,000.00 5
𝑟 = 2 [( ) − 1]
₱14,300.00

𝒓 = 𝟎. 𝟎𝟕𝟎𝟒 or 7. 𝟎𝟒%

Therefore, the rate of interest will be 0.0704 or 7.04%.

4.) How many years will it take for ₱13,000.00 to become ₱20,000.00 at 12.5%
compounded annually?

5
Solution:

Given: P = ₱13,000.00 m=1

F = ₱20,000.00 r = 12.5% or 0.125

𝑟 0.125
𝑖= = = 0.125
𝑚 1

𝐹
log (𝑃 )
𝑡=
𝑚[log(1 + 𝑖 )]
₱20,000.00
log (₱13,000.00)
𝑡=
1[log(1 + 0.125)]
𝒕 =3.66 years

Therefore, ₱13,000.00 will become ₱20,000.00 in 3.66 years.

What’s More

Solve what is asked in each item. Write your complete solutions and answers on
a 1 whole sheet of paper.

1.) Find the final or compound amount of ₱15,900.00 at 5.5% interest compounded
annually for 18 months.
2.) Find the interest on ₱25,750.00 for 3 years at 8% compounded quarterly.
3.) Find the present value of ₱150,000.00 at 15% interest compounded monthly for
6 years.
4.) At what rate of interest compounded semi-annually will ₱21,590.00 accumulate
to ₱26,900.00 in 2 years?
5.) How long will it take for ₱3,700.00 accumulate to ₱6,900.00 at 4.5%
compounded quarterly?

6
 What I Have Learned

Problems Involving Compound Interest

1. Joseph borrows ₱50,000.00 and promise to pay the principal and interest at 12%
compounded monthly. How much must he repay after 6 years?

Solution:

Given: P = ₱50,000.00 m = 12
r = 12% or 0.12 t = 6 years

𝑟 0.12
𝑖=𝑚= 12
= 0.01 𝑛 = 𝑚𝑡 = 12(6) = 72

𝐹 = 𝑃 (1 + 𝑖 ) 𝑛
𝐹 = ₱50,000.00(1 + 0.01 )72
𝑭 = ₱𝟏𝟎𝟐, 𝟑𝟓𝟒. 𝟗𝟕

Therefore, Joseph must repay ₱102,354.97 after 6 years.

2. A loan ₱125,000.00 at 8% compounded quarterly was paid back with an amount of

₱176,000.00 at the end of the period. For how long was the money borrowed?

Solution:

Given: P = ₱125,000.00 r = 8% or 0.08

F = ₱176,000.00 m=4

𝑟 0.08
𝑖= = = 0.02
𝑚 4

𝐹
log (𝑃 )
𝑡=
𝑚[log(1 + 𝑖 )]

₱176,000.00
log (₱125,000.00)
𝑡=
4[log(1 + 0.02)]

𝒕 =4.32 years

Therefore, the money was borrowed for 4.32 years.

7
 3. How much must be invested today in a savings account in order to have ₱50,800.00
in 6 years and 9 months if money earns 5.4% compounded semi-annually?

Solution:
9
Given: F = ₱50,800.00 t = 6 12 years or 6.75 years
r = 5.4% or 0.054 m=2

𝑟 0.054
𝑖=𝑚= = 0.027 𝑛 = 𝑚𝑡 = 2(6.75) = 13.5
2

𝑃 = 𝐹 (1 + 𝑖 )−𝑛
𝑃 = ₱50,800.00(1 + 0.027)−13.5
𝑷 = ₱𝟑𝟓, 𝟒𝟓𝟑. 𝟕𝟗

Therefore, an amount of ₱35,453.79 must be invested today.

What I Can Do

Directions: Answer the following activities and write answers on your answer sheet.

I. Arrange the jumbled letters to form a word/s related to business mathematics.

1.) T M T U R I Y A A E D T
2.) N E E T T R I S E R T A
3.) I I P P C N L R A
4.) O O U D C M N P N U T M A O
5.) I P S E M L T E N T S R E I
6.) E V M N T T N E I S
7.) T E U Y A Q R L R
8.) C M C U E T U L A A
9.) R W O R B O R E
10.) M O C U D O N P T N T R E E S I

II. Suppose you are working in a bank that encourages customers to save money
for their future. Your bank manager requested you to form a team and
formulate a slogan to be used for this savings campaign. Write a short phrase
or slogan to persuade people to open a savings account in the bank where you
work.