COMPOUND

INTEREST
1.1 COMPOUND INTEREST

1.2 PRESENT VALUE OF F AND COMPOUND DISCOUNT

1.3 UNKNOWN RATE AND TIME BY LINEAR

INTERPOLATION

1.4 NOMINAL AND EFFECTIVE RATE

1.5 EQUIVALENT RATES

1.6 EQUIVALENT OF VALUES

 1.1 COMPOUND INTEREST
meaning that the interest you earn each year is added to
your principal, so that the balance doesn't merely grow, it
grows at an increasing rate - is one of the most useful
concepts in finance.

It is the basis of everything from a personal savings plan

to the long term growth of the stock market.
 The formula for compound interest is:

A=P
Where:
A = accumulated amount
P = original investment amount
R = interest rate
N = number of times the money is compounded
T = time
Sample Problems on calculating the Accumulated
Amount using Compound Interest at regular
intervals like Monthly, Quarterly, Semi-Annually,
Annually
a. If an amount of P5,000 is deposited into a savings
account at an annual interest rate of 5%, compounded
monthly, the value of the investment after 10 years?

b. ‌Suppose that you invest P2,000 in an account that

pays 4% interest annually, compounded quarterly.
How much money would you have in the account after
three years?
c. Use the compound interest formula to calculate
the total value of an investment of P10,000 if
interest is paid at 3.2% per year compounded
semi-annually, for 2 years.

d. Mr. Z makes an initial investment of P5,000 for

three years. Find the value of the investment after
the three years if the investment earns a return of
10 % compounded annually.
Sample Problems on Compound Interest if the
Accumulated Amount is given and the
Principal Amount is missing using Compound
Interest at regular intervals like Monthly,
Quarterly, Semi-Annually, Annually
a. After 2 years of 2% interest compounded monthly,
Mr. Fin account has P61,009.50. What was the original
deposit amount?

b. Mr. X has a P50,060.65 accrued amount in his bank.

He invested in a 5 years contract which would earns a
return of 3% compounded quarterly. How much is the
initial investment of Mr. X?
c. Rhina invested P______, at 5% per year compounded
semi annually, her bank has a total accrued amount of
P67,500.02 which she earned after 6 years. What would
be the amount of her initial investment?

b. After 3 years of investing Mr. Z has a total accrued

amount of P45,065.12 which he invested in a 10%
compounded annually. What would be his initial
investment?
 REFERENCE
Compound Interest Calculator. (2022). Retrieved August 22, 2022, from Moneychimp.com website:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Hazell, A. (2022). Popup calculator. Thecalculatorsite.com.

https://www.thecalculatorsite.com/articles/finance/compound-interest-formula.php

If an amount of $ 5,000 is deposited into a savings account at an annual interest rate of 5%, compounded monthly, the
value of the investment after 10 years can be calculated as follows... P=5000 r=5/100=0.05 decimal. n=12 t=10 If we
plug those figures into the formula, we get the following. A=50001+0.05/121211=8235.0 So, the investment balance
after 10 years is $ 8,235.05. (2021). Gauthmath.com. https://www.gauthmath.com/solution/If-an-amount-of-5-000-is-
deposited-into-a-savings-account-at-an-annual-interest--1703416663059462

https://youtu.be/OQ9Mv2jwQWo

4. a Use the compound interest formula to calculate the total value of an investment of $ 10000 if interest is paid at
3.2% per year compounded semi-annually for two years. Show your work. A=Sunderline. (2021). Gauthmath.com.
https://www.gauthmath.com/solution/4-a-Use-the-compound-interest-formula-to-calculate-the-total-value-of-an-
investm-1703778520343557

Gupta, S. (2019, May 29). Compound Interest Examples. WallStreetMojo.

https://www.wallstreetmojo.com/compound-interest-examples/
 1.2 PRESENT VALUE OF F AND
COMPOUND DISCOUNT
• In Compound Interest the present value of a given sum of
money is the Principal (P) which, if invested now at a given
rate would amount to (F) future amount after the number of
conversion periods/ interest period.
• To discount an amount (f) to (n) conversion period means to
find its present value (P) on a day which is (n) periods
before F is due.
 FORMULA’S USE IN CALCULATING PRESENT VALUE OF
F IN COMPOUND INTEREST
F=P
P=F
Where:
P = principal or present value
F = amount due in the future
I = rate per period
N = number of conversion periods
Sample Problems on calculating the
PRESENT VALUE OF F using
Compound Interest.
a. How much should be deposited now at a rate of 12%
compounded quarterly. If the expected amount will
be P10,000 after 5 years?

b. If the sum of P15,000 is deposited in an account

earning interest at the rate of 9% compounded
quarterly what will it become at the end of 8 years?
COMPOUND DISCOUNT
While discount most schedules define discounts for a
quality range, a compound discount provides a discount
that automatically changes for every unit of your
product. Compound discounts help you define a product
discount that scales based on each unit of quantity for
your product.
Formula’s Use in Calculating Compound Discount

FV = PV ( 1+ r )^n
PV = FV / (1 + r )^n
Where:
FV = Future Value
PV = Present Value
I = Annual Interest Rate
N = Number of compounding periods per year
 Sample Problems help you define a
product discount that scales based on
each unit of quantity for your product
using Compound Discount.
a. Assume you put 20,000 dollars (principal) in a bank
for the interest rate of 4%. How much money will bank
give you after 10 years?

b. Assume you temporarily worked in a project, and in the

end (which is present time), you are offered to be paid
2000 dollars now or 2600 dollars 3 years from now.
Which payment method will you choose?
1. 3 UNKNOWN RATE AND TIME
BY LINEAR INTERPOLATION
If we know F, P, and n and we want to determine i, the
periodic rate (from which we can easily determine the
nominal rate), or suppose we know what a certain sum of
money amounts to a certain sum in a known number of
periods, we may want to know what periodic interest rate
will have this effect. It may be approximated by
interpolation. When interpolating, it is sufficient to apply
or use four decimal places of the value given in the table.
Illustrative Example 1:
What rate compounded quarterly, will P1,250 amount to P1,900 in
10 years?
Solution:
P = 1,250 m = 4
F = 1,900 n = 10 x 4 = 40
T = 10 years Required: j = ?
F = P(1 + i )n
1,900 = 1,250 (1+ i )40
(1 + i )40 = 1,900
1,250
= 1.5200
For n = 40 in Table II, we find (1 + i%)40 = 1.4889 and (1+1/8%)40 = 1.5644 closest to
1.5200. it is clear that the rate i to be found is between 1% and 1 1/8 =% and is nearer
1%. Form the array, placing beside each bracket the difference of the two
indicated entries.

1 1% 1.4889
8 % x i 1.5200 0.0311. -0.0755
1- 1.5664

x = 0.0311
1 % 0.0755
8
Illustrative Example 2:
In what time will 2,000 amount to 3,650 at 4%
compounded semi-annually.
Solution:
P = 2,000 F = 3,650 i = 2%
F = P (1+i )n
3,650 = 2,000 (1+2%)n

(1+2%)n = 3,650 = 1.8250

2,000
Nominal and Effective Rate
• When interest is compounded more often than once per year, the given annual
rate is called the nominal rate (j). The rate of interest actually earned in one
year is called the effective rate (w).
• The effective rate corresponding to a nominal rate is obtained by:
w = (1 + ) -1 or (1 + i) -1
• To find the nominal rate corresponding to an effective rate, use
j = m[(1 + w) - 1]
Table X provides values of (1 + w)
Table IX provides the direct values of j or m [(1 + w) -1]
Illustrative Example
1. Find the effective rate corresponding to the rate 8% compounded quarterly.
Given
J = 8% m = 4 i= 2% w = ?
w =(1 + ) -1