Prepared by: Mr.

Zarriz
Ic = F - P
 Conversion or compounding period is the time between interest
calculations. At the end of a period, principle and interest are combined
to form the current period's principal. Converting interest to principal
increases interest earned in subsequent periods. F denotes maturity
(future) value.
t
F = P (1 + r)
Where
F = maturity (future) value
P = principal or original amount of money
r = interest rate
t = term or number of years
 From the formula, F = P (1 + r) t, you F
can derive the formula in finding the Formula: P = t
(1 + r)
present value.
 The compound frequency (or conversion frequency) is the
number of compounding that takes place a year. 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.
Compounding or Conversion Number of Compounding(s) or
Frequency Conversion(s) per Year

Annually 1

Semi-Annually 2

Quarterly 4

Monthly 12

Weekly 52

Daily 365
The formula for the total number of
conversion periods for the whole term
is: n = mt

Where:
n = total number of conversion periods for the whole term
m = number of conversion periods per year
t = time period (term) of the loan or investment
The interest rate (im) is usually expressed as an annual or yearly
rate, and must be changed to the interest rate per conversion period
or periodic rate (j). The formula to be used is: j =i m

Where:
j = rate of interest for each conversion period
im = annual rate of interest
m = frequency of conversion
 The maturity (future) value, compounding m times a year can be
computed using the formula
Where:
F = maturity (future) value F= P(+j) n

P = principal
i = nominal rate of interest (annual rate)
m

m = frequency of conversion
t = term/time in years
 From the formula, F= P(+j) we can derive the formula in finding
n

the present value.

Where: So you will get,
P= F
P = present value (1 + j)n

F = maturity (future) value

im
j = m = rate of interest per conversion period
n = mt = total number of conversion period
Example # 2: Cardo and Onyok aim to accumulate 3 691 215 in 15
years. Which investment will require the largest present value?
5% compounded monthly
5% compounded quarterly
5% compounded semi - annually
Given: Solution: Solution: P = F
n
(1 + j)
P = 3 691 215 a.) When m = 12
m = 3 691 215
t = 15 years j= i (1.0042) 180
m
n = mt 0.05 3 691 215
= =
= (12) (15 yrs) 12 (2.12637)
n = 180 j = 0.0042 = 1 735 923.19

Note: Solve quarterly and semiannually. In-class, I'll check your work.