COMPOUND INTEREST

LESSON: 25 COMPOUND INTEREST

•OBJECTIVES•

• • Compute Interest , maturity value, and Present value in

compound interest and solve problems involving
compound interest.
MATURITY (FUTURE) VALUE AND COMPOUND INTEREST

Where F = P(1+r)^t
P= Principal or Present Value
F= maturity value (future) value at the end of a term
r= interest rate
t= term or times of years
The Compound Interest Ic = F – P
EXAMPLE 1. FIND THE MATURITY VALUE AND THE COMPOUND
INTEREST IF P10,000 IS COMPOUNDED ANNUALLY

AT AN INTEREST RATE OF 2% IN 5 YEARS

Given:
P = 10,000
r = 2% = 0.02
t= 5 years
Solution:
(a) F= P(1+r)^t
F (10,000) (1+0.02)^5
F= 11,040.81
(b) Ic = F – P
Ic= 11040.81 – 10000
Ic= 1040.81
FIND THE MATURITY VALUE AND INTEREST IF £50,000 IS
INVESTED AT 5% COMPOUNDED ANUALLY FOR 8 YEARS

• GIVEN:

P = 50,000
r= 5% = 0.05
t= 8 years
F= (50,000)(1+0.05)^8
F=73,872.77
Ic= ( 73,872.77-50,000)
Ic=23,872.77
WHAT IS THE PRESENT VALUE OF 50,000 DUE IN 7 YEARS IF MONEY
IS WORTH 10% COMPOUNDED ANNUALLY

• Given: F= 50,000
R= 10%= 0.1
T = 7 years
WHAT IS THE PRESENT VALUE OF $50,000 DUE IN 7 YEARS IF THE MONEY IS WORTH
10% COMPOUNDED ANNUALLY.

• Given:
P= $50,000 , r= 10%= 0.1 , t= 7 years
Find the present value
 Principal Value Rate Time Compound Maturity Value (F)
(P) Interest (Ic)
10,000 8% 15 (2) (1)

3,000 5% 6 (4) (3)

50,000 10.5% 10 (6) (5)

(7) 2% 5 (8) 50,000

(9) 9.25% 2.5 (10) 100,000

First find the Maturity Value
1.) F= 10,000(1+0.08)^15
= 10,000(3.172169114)
F= 31,721.69
2.) Ic= 31,721.69 -10,000
= 21,721.69
Compund Interest.
3.) F= 3,000(1+0.05)^6
= 3,000 (1.340095641)
F = 4,020.29
4.) Ic= 4,020.29-3,000
Ic= 1,020.29