COMPOUND INTEREST

• COMPOUND AMOUNT – (future

value) is the final amount of the
investment or loan at the end of
the term or last period.
• COMPOUND INTEREST – is the
difference between compound
amount and the original principal
 Number of
interest/
Interest compounded
compounding
periods in 1 year
Annually or once a year 1
Semi-annually or every 6 2
months
Quarterly or every 3 4
months
Monthly or once a month 12
Daily or once a day 365/366 (leap
year)
 TERMS:
• CONVERSION PERIOD OR INTEREST PERIOD – this is the
time between two successive conversions of interest
• FREQUENCEY OF CONVERSION – this is the number of
conversion periods of the investment or loan per year.
• NOMINAL RATE – this is the stated rate of interest per
year
• RATE PER CONVERSION PERIOD – this is the rate of
interest for each conversion period
• NUMBER OF CONVERSION PERIOD – this is the total
number of times interest is calculated for the entire
term of the investment or loan.
• (1+ i) n – accumulation factor for compound interest
Symbols DEFINITION
P ORIGINAL PRINCIPAL
COMPOUND AMOUNT OR MATURITY
M VALUE OR accumulated value pf P at end of
n periods.
m FREQUENCEY OF CONVERSION
j NOMINAL RATE
𝑗
i RATE PER CONVERSION PERIOD
𝑚

t TERM OF INVESTMENT OR LOAN IN YEARS

n NUMBER OF CONVERSION PERIOD (t x m)
 FINDING THE COMPOUND AMOUNT
AND INTEREST
• FORMULA:
𝑗 𝑛
M=P 1+ or M= P(1+ i)n
𝑚

And I =M – P
 EXAMPLES:
A. Find the compound amount and compound
interest on:
1. ₱10,000.00 for 5 years at 6% compounded
annually
2. ₱ 15,250.00 for 4 years and 6 months at 8%
compounded semi-annually
B. Find the maturity value and compound
interest of an investment of ₱ 65,000.00 that is
placed in a savings fund that pays 5.75%
compounded quarterly for 4 years and 6
months.
 FINDING THE PRESENT VALUE
• FORMULA P = M(1+i)-n
Example:
Find the present value of:
1. ₱ 12,850.00 due in 3 years if the
interest rate is 8% compounded
quarterly
2. ₱49,250.45 due in 5 years and 5
months. If money is worth
2
6 % compounded monthly.
5
3. How much must be invested today
in a savings account in order to have
₱50,800.00 in 6 years and 9 months. If
the money ears 8 ½ % compounded
quarterly?
 Finding the rate of interest
1
𝑀 𝑛
Formula: 𝑗=𝑚 − 1 𝑥 100
𝑃
Example:
1. At what rate of interest compounded annually
will ₱60,000.00 accumulate to ₱70,000.00 in 2
years?
2. Find the nominal rate of interest compounded
quarterly at which ₱40,000.00 accumulates to
₱60,000.00 in 7 years.
3. At what rate compounded quarterly will
₱25,000.00 accumulate to ₱26,995.47 in 2 years
 Find the time
𝑀
𝑙𝑜𝑔
• Formula: 𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠 = 𝑃
÷m
log(1+𝑖)

• Examples:
1. How many years will it take for ₱13,000.00 to
become ₱20,000.00. if it is invested at 8%
compounded quarterly?
2. How long in years will it take for ₱25,000.00
to earn an interest of ₱10,000.00 if it is
invested at 6% compounded monthly?
3. How many years will it take
₱80,000.00 to earn ₱60,000.00 if the
interest rate is 6% compounded
monthly?