LESSON 27: PRESENT

VALUE AT
COMPOUNDING MORE
THAN ONCE A YEAR
Lesson Outline:
•Compounding more than once a year.
•Finding present value when compound
interest is computed more than once a
year.
Definition of terms:
• Conversion or interest period – time between
successive conversions of interest.
•Frequency of conversion (m) – number of
conversion periods in one year.
•Nominal rate () – annual rate of interest.
•Rate () of interest for each conversion period

=
•Total number of conversion periods n

N= tm = (frequency of conversion) x (time in years)

*In the previous lesson, r was used to denote the
interest rate. Now that an interest can refer to two
rates (either nominal or rate per conversion period)
the symbol and j will be used instead.
Examples of nominal rate and the corresponding
frequencies of conversion and interest rate for
each period.
 = Nominal rate M= j = Interest Rate per One conversion
(Annual Interest Rate) Frequency of Conversion Period period
conversions

2% compounded annually;
= 0.02 1 = 0.02 = 2% 1 year
2% compounded semi-
annually;
= 0.02
2 = 0.01 = 1% 6 months
2% compounded
quarterly;
= 0.02
4 = 0.005 = 0.5% 3 months
2% compounded monthly:
= 0.02 12 = 0.0016= 0.16% 1 month
2% compounded daily;
= 0.02 365 1 day
•Let us recall from lesson 25 how to compute for
the compound amount when the principal P is
invested at an annual interest rate j
compounded annually,

We can modify this formula by noting that:

•The rate for each conversion period is j=
•In t years, interest is compounded mt times.
Thus, you obtain the following formula:
Maturity Value, Compounding m time a years

Where, F = maturity (future) value

P = principal
= nominal rate of interest (annual rate)
m = frequency of conversion
t = term/ time in years
*
has the same structure as

Where, j and refer to the interest rate per

conversion period,
t and mt refer to the number of times
that interest is compounded
 THE FORMULA FOR FINDING PRESENT VALUE
AT COMPOUNDING MORE THAN ONCE A YEAR
Present value P at Compound Interest

Where, F = maturity (future) value

P = principal
m = frequency of conversion
= nominal rate of interest (annual rate)
t = term/ time in years
EXAMPLE 1.
Find the present value and interest of 50,000
pesos due in 4 years if the money is invested
at 12% compounded semi-anually.
EXAMPLE 2.
What is the present value of 25,000 due in 2
years and 6 months if the money is worth
10% compounded quarterly?
EXAMPLE 3.
Cris borrows 50,000 pesos and
promises to pay the principal and
interest at 12% COMPOUNDED
MONTHLY. How much he repay
after 6 years?
EXAMPLE 4.
How much should you invest in a
fund earning 9% compounded
monthly if you want to accumulate
200,000 pesos in 3 years and 3
months?
EXAMPLE 5.
What is the present value of
25,000 pesos due in 2 years and
6 months if money is worth 10%
COMPOUNDED QUARTERLY?
THANK YOU!!!