(Week 13 and 14)

MATHEMATICS OF INVESTMENT(COMPOUND INTEREST)

The learner…
1. Identify the principal value, interest rate and time in years on problem
regarding simple interest; and
2. Solve problems involving compound interest.

Before you begin with the study of this topic, you are advised to make sure that
you are free from all distractions as all the principles here have to be fixed firmly in
your mind. Read the instructions below as these will help as you engage in your self-
study.

 Follow carefully all the instructions indicated in this module.

 Prepare all the materials needed like pen and paper.
 Take note of important key concepts.
 At the end of the discussion, practice exercises are provided.
 You may ask your parent’s help in dealing with your study.
 If you want your teacher may help you with the lesson.
 In case you want to clarify something, your teacher is here to guide you.

The Simple Interest I is the amount equal to P x r x t, where P is the

Principal, r is the annual interest rate and t is time in years.

The amount borrowed is called the principal. The rate of interest is the
percentage of principal payable per period of time. The rate of interest is often
expressed as a percentage per year (or per annum), e.g. 5% per year.

The Compound Interest on P is the amount of interest charged to the amount P and
the interest earned on previous time periods.
Future value under compound interest
The future value of P borrowed (or invested) at annual interest rate r at time t is given
by A=P(1+r)t.

Problem 1

Find the future value of each of the following at a given annual rate
compounded annually and the given time:

a. P 1000 at 2% after 3 years

A=P(1+r)t.
=1000(1+.02)3
=1000 (1.02)3
=1000(1.061208)

A= P 1061.21

b. P 2500 at 2.75% after 5 years

A=P(1+r)t.
=2500(1+.0275)5
=2500 (1.0275)5
=2500(1.145273344)

A= P 2863.18

c. P 10,000 at 1% after 4 years

A=P(1+r)t.
=10,000(1+.01)4
=10,000 (1.01)4
=10,000(1.04060401)

A= P 406.04

The compound interest on P borrowed (or invested) at an annual

compound interest rate r at a time t is A – P= P [(1+r) t -1]

Problem 2
Five years ago, Anna put her savings worth P10,000 in an account providing a
compound interest rate of 3.5% annually. Find the value of her savings today and the
amount of interest.

P= 10,000, r= 0.0035, and t=5

 A=P(1+r)t.
=10,000(1+.035)5
=10,000 (1.035)5
=1000(1.187686306)

A= P 11,876.86

The value of Ana’s savings today is P 11, 876.86

The amount of interest earned is P 11,876.76- P10,000= P 1,876.86.

A
The Present Value Formula P =
(1+r )t

Problem 3

What is the present value of P 50,000 due in 7 years if money is worth 10%
compounded annually?

Given: A=50,000 r=10%= 0.1 t=7 years P=?

A
P= t
(1+r )
50,000
P= 7
(1+0.1)
P= 25, 657.91

The present value is P 25, 657.91.

Problem 4

How much money should a student place in a time deposit in a bank that pays 1.1%
compounded annually so that he will have P200,000 after 6 years?

Given: A=200,000 r=1.1%= 0.011 t=6 years P=?

A
P=
(1+r )t
 200,000
P= 6
(1+0.011)
P= 187, 293.65

The student should deposit P187, 293.65 in the bank.

Activity

A. Compound Interest
A=P(1+r)t (Show your solution)
Fill in the blanks.
A P r t
(MATURITY (PRINCIPAL (RATE) (TIME)
VALUE) AMOUNT)
1. P 10,000 2% 3 yrs

2. P 400 5% 6 months

3. P 200,000 10% 2 yrs

4. P 450,000 9% 18 months

5. P 320,000 2.5% 5 yrs

6. P 73, 980 4% 2 yrs

7. P 261, 950 10% 3 yrs

8. P 35, 600 7.5% 4 yrs

9. P 95, 790 3% 1 yr

10. P 69, 600 10% 2 yrs

B.PROBLEM SOLVING
1. Find the maturity value and the compound interest if P 10, 000 is compounded
annually at an interest rate of 2% in 5 yrs.
2. Find the maturity value and interest if P 50, 000 is invested at 5% compounded
annually for 8 yrs.
3. What is the present value of P50,000 due in 7 yrs if money is worth 10%
compounded annually?
4. In order to have P 50,000 in 5 yrs, how much should you invest if the compound
interest is 5%.
5. In a certain bank, Angel invested P 88, 000 in a time deposit that pays 0.5%
compound interest in a year. How much will be her money after 6 yrs? How much
interest will she gain?

The Compound Interest on P is the amount of interest charged to the amount P and
the interest earned on previous time periods.
Future value under compound interest
The future value of P borrowed (or invested) at annual interest rate r at time t is given
by A=P(1+r)t.