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DLSUD-SHS
General Mathematics
THE CONCEPT OF
COMPOUND
INTEREST
is the procedure
in which interest is
periodically
calculated
and added to the
principal.
1. COMPOUND INTEREST ( I )
This is an interest resulting from the periodic
addition of simple interest to the principal
amount
2. COMPOUND AMOUNT ( A )
This is an accumulated amount composed
of the principal and the compound interest.
Recall that in SIMPLE INTEREST
for a given principal amount P,
for a time period of t years,
and interest rate r
the accumulated value / future value
of P is given by:
A = P(1 + rt)
Present worth of Future Value of Principal Amount
Period Principal Amount (F)
(P)
1 P P(1+i)
2 P(1+i) P(1+i)*(1+i) = P(1+i)2
3 P(1+i)2 P(1+i)2*(1+i) = P(1+i)3
4 P(1+i)3 P(1+i)3 *(1+i) = P(1+i)4
. . .
. . .
. . .
Formulas: A = P(1+i)n
I=A-P
3. COMPOUNDING/CONVERSION PERIOD (m)
is the number of times in a year the interest will be
compounded.
Semiannual 2 6 months
Quarterly 4 3 months
Bimonthly 6 2 months
Monthly 12 1 month
CONVERSION PERIOD
The interest earned during a period is
“converted” to principal at the end of the
period and becomes the new principal for the
succeeding period.
Note:
If the conversion period is not indicated in the
problem, assume that the conversion period is
annual or m=1.
Example #1: COMPOUND AMOUNT (A)
A n
P or P A( 1 i )
(1 i ) n
Example #1: PRINCIPAL (P)
A
r m n 1
P
Examples:
1. If ₱20000 will accumulate to ₱45758.55
in 14 years, what is the interest rate
compounded bimonthly?
A
log
t P
mlog( 1 i )
Examples:
1. How long would it take for ₱10600 to
mature into ₱15000 if 16% interest is
computed semiannually?