COMPOUND INTEREST n = total number of compoundings EXAMPLE:

COMPOUND INTEREST n = (t)(m) 1. Consider a bank deposit of P1,000.00 to

- Interest is computed every end of each
interest period.
- Interest earned for that period is added to
the new principal.
Example: Consider an investment of P1,000.00 to
earn 10% per year in three years.
If Simple Interest:
If Compound Interest:
I = Interest
r = nominal interest rate
E.R. = Effective Interest Rate
t = number of years of investment
m = compoundings per year
To Compute F given P:
F = P(1 + i)n
Note: The term (1 + i)n is called “Single
Payment Compound Amount Factor”
CONTINOUS COMPOUNDING
To Compute P given F:
P = F(1 + i)-n
Note: The term (1 + i)-n is called “Single
Payment Present Amount Factor”
Values of i and n:
Nominal interest rate = 12%
Number of years of investment = 5 years
earn 6% compounded quarterly. How
much is the interest in one year?
2. What rate of interest compounded
annually must be received if an
investment of P54,000.00 made now will
result in a receipt of P72,000.00 five years
from now?
3. If P500,000.00 is deposited at a rate of
11.25% compounded monthly, determine
the interest after 7 years and 9 months.
- Interest may be computed daily, hourly,
per minute, etc.
- Limit of interest may be considered to be
compounded infinite number of times
annually.
- m= Ꝏ
- the future worth of P at an interest rate of r
- is compounded continuously for t years.

• Annually (m = 1) F = (P)(ert)
r 0.12
i= = = 𝟎. 𝟏𝟐
m 1
n = (t)(m) = (5)(1) = 5 Example: The nominal interest rate is 4%.
• Quarterly (m = 4) How much is P10,000.00 worth in 10 years
r 0.12 in a continuously compounded account?
i=
m
=
4
= 𝟎. 𝟎𝟑 Given:
Elements of Compound Interest: P = P10,000.00
P = Present Worth/Principal n = (t)(m) = (5)(4) = 20
• Semi-Annually (m = 2) r = 0.04
F = Future Worth t = 10 years
i = effective interest per compounding period • Monthly (m = 12)
• Bimonthly (m = 6) F = (P)(ert)
(per interest period) F = (10,000)(e(0.04)(10))
r • Weekly (m = 52)
i= F = P14,918.25
m
NOMINAL AND EFFECTIVE RATE Example: What interest compounded monthly is
Nominal Rate equivalent to an interest rate of 14%
- rate quoted in a given variety of compounded quarterly?
compound interest. Given:
Effective Rate Compounded Monthly:
- the actual interest earned in one year. m = 12
Example: Consider a bank deposit of P1000.00 to Compounded Quarterly:
earn 6% compounded quarterly. m=4
Given: r = 0.14
P = P1000.00 ERmonthly = ERQuarterly
r = 0.06
i = 0.06/4 𝑟 12 0.14 4
(1 + 12) -1 = (1 + ) -1
n = 1(4) 4
r = 0.1384 = 13.84%
F = P(1 + i)n
F = (10000)(1+0.06/4)1(4)
Thus 14% compounded quarterly will have the
F= P1061.36
same interest as 13.84% compounded monthly.
**But notice that 1061.36 is not 6% but 6.136% of
P1000.00

𝒓 𝒎
ER = (𝟏 + ) -1
𝒎

Thus the effective rate od 6% compounded

quarterly is:

0.06 4
ER = (1 + 4
) -1

ER = 0.06136 = 6.136%

Essentially, the effective rate compounded

continuously is:

ER = er – 1