MODULE 5

FINDING THE INTEREST RATE

In the basic formula F=P ( 1+ i )n ,there are four variables involved, the final compound amount,
F , the principal P , the interest rate and the conversion period n . If F , Pand n are given, the interest
rate can be determined by using the formula, by means of interpolation and by means of logarithm.

Example 1

If P 5,000 amounts to P 7,000 in 5 years with interest compounded quarterly, what is the
nominal rate of interest?

Solution:
Given: P=P 5,000 t=5 years
F=P 7,000 m=4

Find: j
n=mt
¿ 4 ( 5 )=20

From F=P ( 1+ i )n
F
( 1+i )n ¿
P
P 7,000
( 1+i )20 ¿
P 5,000
( 1+i )20 ¿ 1.400

Extracting the 20th root of both sides, we have:

√( 1+i )
20 20
¿ √1.400
20

Then, ( 1+i ) ¿ ( 1.400 )1 /20

i ¿ ( 1.4 )1/ 20−1
i ¿ 1.0169659−1
i ¿ 0.0169659 x 100
¿ 1.69659 %

but i ¿ j/m
therefore, j=mi

j=4 ¿
¿ 6.78 %

FINDING THE TIME

 When the principal, amount, and rate are known, the time could be determined. To determine
the time, use the interpolation method or the logarithm method.

Example 2
How long will it take P 2,000 to amount to P 3,500at 9% compounded quarterly?

Solution:
Given: P=P 2,000
1
F=P 3,500 j=9 % ; m=4 ; i=9 % /4 ¿ 2 %
4

Find: n and t

Using logarithmic method:

F=P ( 1+ i )n

P 3,500 ¿ P 2,000 (1+2 1/4 )n

( 1+2
4 )
1 n P 3500
% =
P 2000

( 1+0.0225 )n =1.75

( 1.0225 )n ¿ 1.75

Taking the logarithm on both sides:

n
log ( 1.0025 ) =log 1.75
n log 1.0025=log 1.75
log 1.75
n= =25.1488 periods
log 1.0025

n 25.1488
t= =
m 4
t=6.29 years

Exercises:

1. A man put P 100,000 in a savings account that pays 13% interest converted semi-annually. If he
decides to withdraw his money when it grows to P 150,000 when should he withdraw his money?

2. If P 10,000 amounts to P 14,000 in 5 years with interest compounded quarterly, what is the
nominal
rate of interest?
3. How long will it take for $ 8,000 to amount to $10,000 at 16% converted semi-annually?