MIDTERM CONTINUOUS COMPOUND INTEREST

Compound interest is interest calculated on the initial principal and also

WEEK/MODULE-4 on the accumulated interest of previous periods of a deposit or loan.
The effect of compound interest depends on frequency.
Objectives/Outcomes:
Instead of calculating interest on a finite number of periods, such as
At the end of this module, you will be able to: yearly or monthly, continuous compounding calculates interest
assuming constant compounding over an infinite number of periods.
1. Solve problems involving effective rate of interest Theory: The rate of increase of money at any time is directly
2. Solve problems involving annuity proportional to the amount of money present at any time (t).
3. Analyze problems involving types of annuity
𝑭 = 𝑷𝒆𝒊𝒏
EFFECTIVE RATE OF INTEREST

The effective annual interest rate is the real return on a savings

𝑬𝑹 = 𝒆𝒊 − 𝟏
account or any interest-paying investment when the effects of
where:
compounding over time are taken into account. It also reveals the real
percentage rate owed in interest on a loan, a credit card, or any other
P= principal or capital amount
debt.
i= annual rate of interest
It is also called the effective interest rate, the effective rate, or F= future amount
the annual equivalent rate. n= number of years
ER= effective rate of interest
Effective Rate (ER)- is the actual rate of interest earned on the
principal during a period of one year.
EXAMPLE: You deposit $10,000 in a savings account five years ago.
𝑵𝑹
𝑬𝑹 = (𝟏 + 𝒊 )𝒎 −𝟏 𝒊= The account has earned 5.25% interest compounded continuously
𝒎 since then. How much is the account today?

EXAMPLE: What effective annual interest rate corresponds to a Solution:

nominal rate of 8% compounded monthly?

Solution:

EXAMPLE: What effective annual interest rate corresponds to a

EXAMPLE: If interest is paid at a rate of 5 % per year, compounded nominal interest rate of 15% per year, compounded continuously?
quarterly, what is the effective rate?
Solution:
Solution:

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