Compound

Interest
ENGR. ANTONIO CARMELITO LIZADA
Compound Interest

Whenever the interest charge for any interest period is based on the
remaining principal amount plus any accumulated interest charges up to
the beginning of that period the interest is said to be compounded.
In calculations of compound interest, the interest for an interest
period is n calculated on the principal plus total amount of interest
accumulated in previous periods. Thus compound interest means
“interest on top of interest.”
Discrete Compounding
The formulas are for discrete compounding, which means that the interest
is compounded at the end of each finite length period ,such as a month or
a year.
Discrete Cash Flows
The Formulas also assume discrete (i,e., lump sum) cash flows spaced at
the end of equal time intervals on a cash flow diagram.
 Derivation of Formula
Interest Principal at Interest Earned Amount at End
Period Beginning of During Period of Period
Period
1

...

n
The quantity (1+i)n is commonly called the “single payment compound
amount factor” and is designed by the functional symbol F/P, i%, n. Thus,

The symbol F/P, i%, n is read as “F given P at i percent in n interest

period.”,

The quantity (1-i)-n is called the “single payment present worth factor”
and is designated by the functional symbol P/F, i% ,n. Thus,

The symbol P/F, i%, n is read as “P given F at i percent in n interest

periods.”
Problem:
How long will it take inventory to triple itself if invested of 12% per unit?
n=9.69yrs.
You deposit P3,000 in a savings account that 9% simple interest per
year. How many years will it take to double your balance? If instead you
deposit the P3,000 in another savings account that earns 8% interest
compounded yearly, how many years will it take to double your
balance?
a. 11.11yrs.
b. 9yrs.