Compound Interest

General Mathematics
Lesson Objectives
At the end of the lesson, the students must be
able to:
• define compound interest;
• illustrate compound interest; and
• solve problems involving compound interest.
Compound Interest
It is when the interest due at the end of a
certain period is added to the principal and that
sum earns interest for the next period.
Compound Interest Illustration
PRINCIPAL
AT THE AMOUNT (AT THE END
START OF INTEREST OF THE YEAR)
THE YEAR
First Year ₱40 000.00 40 000 × 0.06 × 1 = ₱2 400.00 ₱40 000.00 + ₱2 400.00
= ₱42 400.00
Second Year ₱42 400.00 42 400 × 0.06 × 1 = ₱2 544.00 ₱42 400.00 + ₱2 544.00
= ₱44 944.00
Third Year ₱44 944.00 44 944 × 0.06 × 1 = ₱2 696.64 ₱44 944.00 + ₱2 696.64
= ₱47 640.64

The amount (A) at the end of the year is equal to

the sum of the principal (P) and the
interest (Pr) for that year. In symbols,
A = P + Pr = P(1 + r)
Compound Interest Illustration
Thus
First Year : A = 40 000(1 + 0.06)
= 42 400.00
Second Year : A = 42 400(r + 0.06)
= 40 000(1 + 0.06)(1 + 0.06)
= 40 000(1 + 0.06)2
= 44 944.00
Compound Interest Illustration
Third Year : A = 44 944(1 + 0.06)
= 40 000(1 + 0.06)2 (1 + 0.06)
= 40 000(1 + 0.06)3
= 47 640.64
In general, when interest is compounded
annually for n years, the amount (or future
value) A is
t
A  P(1  r )
Compound Interest Illustration
• Note: Because interest is paid on interest,
compound interest is always greater than
simple interest.
• In the example, at 6% the simple interest on ₱40
000.00 is ₱2 400.00 per year; hence,
₱7 200.00 for three years. After three years, the
amount of compound interest ₱7 640.64 (₱47
640.64 – ₱40 000.00 = ₱7 640.64) is ₱440.64
more than the amount at simple interest.
Sample
Identify the interest rate per compounding
period and the number of compounding
periods for each of the following investments.

a. 12% compounded monthly for 4 years

b. b. 10.2% compounded quarterly for 9 quarter
Solution for Sample
a. r = 12% = 0.12 and K = 12 (months per year),
r 0.12
then 12  12  0.01 . The number of
compounding periods is 12t = 12 · 4 = 48.

b. r = 10.2% = 0.102 and K = 4 (quarters per

r 0.102
year), then = 4  4  0.026 . The number of
compounding periods is 9.
Exercise A
Ana deposits ₱100 000.00 in a savings account
and leaves it there for 5 years to accumulate
interest at 9% compounded semi-annually. Give
the term for each value in relation to the
Problem.
1. ₱100 000.00
2. 5 years
3. 4.5%
4. ₱155 296.94
5. ₱55 296.94
Exercise B
1. Lauro deposited ₱64 600.00 in a savings
account which pays 8% interest compounded
semi-annually. What will his balance be in 4
years?
2. Glenda deposits ₱5 000.00 in a savings
account which pays 5% compounded annually.
The money is left for 3 years. Find the account
balance at the end of 3 years