CHAPTER 5

1. Explain the concept of time value of money.

2. Important terms used in compound interest (CI)
3. Determine the periodic interest rate (i) & no. of interest periods (n)
4. Derive the compound amount formula.
5. Use the compound amount formula to solve problems relating to
investments & loans
 SIMPLE INTEREST COMPOUND INTEREST

Jungkook invest RM1000 in an account Jennie invest RM1000 in an account

earning 5% interest annually for 10 earning 5% interest compounded
years. annually for 10 years

Simple Interest (SI) - RM Compound Interest (CI) - RM

Year
Principal SI Earned Simple Amount Principal CI Earned Compound Amount
1 1000.00 50.00 1050.00 1000.00 50.00 1050.00
2 1000.00 50.00 1100.00 1050.00 52.50 1102.50
3 1000.00 50.00 1150.00 1102.50 55.13 1157.63
4 1000.00 50.00 1200.00 1157.63 57.88 1215.51
5 1000.00 50.00 1250.00 1215.51 60.78 1276.28
6 1000.00 50.00 1300.00 1276.28 63.81 1340.10
7 1000.00 50.00 1350.00 1340.10 67.00 1407.10
8 1000.00 50.00 1400.00 1407.10 70.36 1477.46
Reference: 9 1000.00 50.00 1450.00 1477.46 73.87 1551.33
Navicore Solutions 10 1000.00 50.00 1500.00 1551.33 77.57 1628.89
 Compound interest (CI) is based on the Principal
What is amount plus with the accumulated interest
Compound earned/incurred over the time.
Interest (CI)?
Interest earned is compounded/converted into
principal & earns interest thereafter

Compound Interest (CI) - RM COMPOUND INTEREST

Year
Principal CI Earned Compound Amount 140.00
1 1000.00 50.00 1050.00 130.00
2 1050.00 52.50 1102.50 120.00
110.00
3 1102.50 55.13 1157.63

Interest (RM)
100.00
4 1157.63 57.88 1215.51
90.00
5 1215.51 60.78 1276.28 80.00
6 1276.28 63.81 1340.10 70.00
7 1340.10 67.00 1407.10 60.00
8 1407.10 70.36 1477.46 50.00
40.00
9 1477.46 73.87 1551.33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
10 1551.33 77.57 1628.89 Year
Simple Interest vs Compound Interest
SI (RM) CI (RM)
Year
Principal SI Earned Principal CI Earned
1 1000.00 50.00 1000.00 50.00
2 1000.00 50.00 1050.00 52.50
3 1000.00 50.00 1102.50 55.13 SIMPLE INTEREST vs COMPOUND INTEREST
4 1000.00 50.00 1157.63 57.88 140.00
5 1000.00 50.00 1215.51 60.78 130.00
6 1000.00 50.00 1276.28 63.81 120.00
7 1000.00 50.00 1340.10 67.00 110.00

Interest (RM)
8 1000.00 50.00 1407.10 70.36 100.00
9 1000.00 50.00 1477.46 73.87 90.00
10 1000.00 50.00 1551.33 77.57 80.00
11 1000.00 50.00 1628.89 81.44 70.00

12 1000.00 50.00 1710.34 85.52 60.00

13 1000.00 50.00 1795.86 89.79 50.00

14 1000.00 50.00 1885.65 94.28 40.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
15 1000.00 50.00 1979.93 99.00 Year
16 1000.00 50.00 2078.93 103.95
17 1000.00 50.00 2182.87 109.14 SI Earned CI Earned

18 1000.00 50.00 2292.02 114.60

19 1000.00 50.00 2406.62 120.33
20 1000.00 50.00 2526.95 126.35
TOTAL 1000.00 TOTAL 1653.30
 Simple Amount vs Compound Amount
SI (RM) CI (RM)
Year
Principal SI Earned S. Amount Principal CI Earned C. Amount
SIMPLE AMOUNT vs COMPOUND AMOUNT
1 1000.00 50.00 1050.00 1000.00 50.00 1050.00 2,700.00
2 1000.00 50.00 1100.00 1050.00 52.50 1102.50 2,600.00
3 1000.00 50.00 1150.00 1102.50 55.13 1157.63 2,500.00

4 1000.00 50.00 1200.00 1157.63 57.88 1215.51 2,400.00

5 1000.00 50.00 1250.00 1215.51 60.78 1276.28 2,300.00

6 1000.00 50.00 1300.00 1276.28 63.81 1340.10 2,200.00

7 1000.00 50.00 1350.00 1340.10 67.00 1407.10 2,100.00

8 1000.00 50.00 1400.00 1407.10 70.36 2,000.00

1477.46

Amount (RM)
1,900.00
9 1000.00 50.00 1450.00 1477.46 73.87 1551.33
1,800.00
10 1000.00 50.00 1500.00 1551.33 77.57 1628.89
1,700.00
11 1000.00 50.00 1550.00 1628.89 81.44 1710.34
1,600.00
12 1000.00 50.00 1600.00 1710.34 85.52 1795.86
1,500.00
13 1000.00 50.00 1650.00 1795.86 89.79 1885.65
1,400.00
14 1000.00 50.00 1700.00 1885.65 94.28 1979.93
1,300.00
15 1000.00 50.00 1750.00 1979.93 99.00 2078.93
1,200.00
16 1000.00 50.00 1800.00 2078.93 103.95 2182.87
1,100.00
17 1000.00 50.00 1850.00 2182.87 109.14 2292.02
1,000.00
18 1000.00 50.00 1900.00 2292.02 114.60 2406.62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
19 1000.00 50.00 1950.00 2406.62 120.33 2526.95 Year
20 1000.00 50.00 2000.00 2526.95 126.35 2653.30
TOTAL 1000.00 TOTAL 1653.30 Simple Amount Compound Amount
How to calculate Compound Interest?

• To calculate the compound interest (CI), we need to

know the value of P & S first.

• Then, we can calculate the CI using

𝑰𝑰 = 𝑺𝑺 − 𝑷𝑷
because CI don’t have a particular formula like in SI.
How to calculate the value of S in CI?

VARIABLE MEANING
 Compound Amount/
S Accumulated Value/
Future value
P  Principal amount
where k  Annual nominal rate
m  Frequency of conversion
i  Periodic interest rate
t  interest period/term
n  No. of interest period
Interest ‘compounded’ Frequency, (m)
Daily 𝑚𝑚 = 360 / 365/ 366
Weekly 𝑚𝑚 = 52
Monthly 𝑚𝑚 = 12
12
Every 𝑛𝑛𝑡𝑡𝑡 - month 𝑚𝑚 =
𝑛𝑛
Quarterly 𝑚𝑚 = 4
Semi-annually 𝑚𝑚 = 2
Yearly / Annually 𝑚𝑚 = 1
RM20,000 is invested in an investment fund that
pays 6% compounded annually for 10 years. Find:
a) The original principal amount
b) The nominal interest rate
c) The interest period
d) The frequency of conversion
e) The periodic interest rate
f) The number of interest period during the investment
g) The compound amount
h) The interest earned
Randy borrowed RM3,000 at 8% compounded
monthly for four years. Find the amount of
interest charged. Answer: RM1,127
Wawa invested RM17,000 into her account k%
compounded quarterly. After 5 years, the account
balance has accumulated to RM21,262.76. Determine Answer: 4.5%
the interest rate k% compounded quarterly.
Amirul deposited RM1,000 in a savings account at 3%
compounded monthly. Find the number of months
required if he wanted the amount in the account to Answer: 278 months
become RM2,000.
ADDED/DEDUCTED

SPECIAL CASE TYPE I

Arnold opened a savings account which offered an
interest rate of 10% compounded quarterly with an
initial deposit of RM2,000. Two years later, he deposited Answer: RM6,624.23
RM3,000 into the same account. Find the amount
accumulated four years after the initial deposit.
ADDED/DEDUCTED

SPECIAL
CASE
TYPE I
SPECIAL CASE TYPE II
Mong Jyu saved RM8,500 at ABC Bank for 7 years and 9
months. The bank offered an interest rate of 4.5%
compounded every 4 months for the first 4 years and
Answer: RM12,253.84
5% compounded monthly for the rest of the period. Find
the future value of this savings.
SPECIAL
CASE
TYPE II