Lesson 2

Compound
Interest
 Objectives

At the end of this lesson, the learner should be able to

● properly differentiate compound from simple

interest;

● accurately calculate compound amount and

compound interest; and

● correctly solve problems involving compound

interest.
 Essential Questions

● How will you calculate a compound amount?

● How will you calculate a compound interest?

● How will you solve problems involving compound interest?

 Warm Up!

Before we thoroughly discuss compound interest, let us

watch a short video clip that recalls our past lesson on simple
interest and introduces the new lesson.

(Click the link to access the video.)

Takota Asset Management. “Simple vs. Compound Interest.”

Youtube. Accessed April 16, 2019 from
https://bit.ly/2sqyH9r.
 Guide Questions

● According to the video, how can you simply describe what

compound interest is?

● How is compound interest different from simple interest?

● If an investment is to be maintained for more than one

year, which interest is more recommended? Why?
 Learn about It!

Compound Interest
1 interest calculated on the total of the principal and previously calculated interests

Example:
This table shows the
compound interest if
pesos earns interest
compounded annually for
years.
 Learn about It!

2 Compounding Period
the time interval it takes for money to earn interest in a year

Example:
 Learn about It!

Nominal Rate
3 the annual interest rate that does not take into account the compounding period

Example:

If a loan earns an interest of and is compounded quarterly

per annum, then is the nominal rate.
 Learn about It!

Periodic Rate
4 the interest rate per compounding period; equal to the nominal rate divided by the
number of compounding periods in a year

Example:

If a loan earns an interest of and is compounded quarterly

per annum, then is the periodic rate.
 Learn about It!

Compound Amount
5 the accumulated value of the principal and all interests from prior periods;
calculated using the formula , where is the principal amount, is the nominal rate,
is the frequency of the compounding period, and is the time in years.

Example:
What is the compound amount of a pesos loan with an
interest rate of compounded semiannually in year?
 Learn about It!

Example:
 Try It!

Example 1: Jeff borrowed ₱ at compounded quarterly for a

year. Determine the amount Jeff has to pay at the end of the
loan term.
 Try It!

Example 1: Jeff borrowed ₱ at compounded quarterly for a

year. Determine the amount Jeff has to pay at the end of the
loan term.
Solution:
The problem asks for the final amount to be paid, which is the
compound amount. Thus, we can use the formula

From the given problem, we have , (since the compounding

period is quarterly), and year.
 Try It!

Substituting the above values into the formula, we have the

following.

Hence, Jeff has to pay a total of ₱ at the end of the loan term.
 Try It!

Example 2: How much will be the interest if ₱ is to be

invested for years at interest rate compounded
semiannually?
 Try It!

Example 2: How much will be the interest if ₱ is to be

invested for years at interest rate compounded
semiannually?
Solution:
1. To find the interest, we need to calculate the compound
amount first.
,
,
(since the compounding period is semiannually), and
years.
 Try It!

Substituting these values to the formula for the compound

amount, we have the following.
 Try It!

2. Deduct the principal amount from the compound amount.

Therefore, the investment will earn ₱ in interest after

years.
 Let’s Practice!

Individual Practice:

1. Errol deposited his ₱ in a bank that offers interest

compounded quarterly. If he decided to invest the money
for years, how much will be the total amount in his bank
account?

2. How much will be the interest if ₱ is to be invested for

years at interest rate compounded monthly?
 Let’s Practice!

Group Practice: To be done in groups of four.

Which has more earnings in a year: ₱ invested at interest

rate compounded semiannually or₱ invested at interest rate
compounded monthly?
Key Points

Compound Interest
1 interest calculated on the total of the principal and previously calculated interests

2 Compounding Period
the time interval it takes for money to earn interest in a year

Nominal Rate
3 the annual interest rate that does not take into account the compounding period
Key Points

Periodic Rate
4 the interest rate per compounding period; equal to the nominal rate divided by the
number of compounding periods in a year

Compound Amount
5 the accumulated value of the principal and all interests from prior periods;
calculated using the formula , where is the principal amount, is the nominal rate,
is the frequency of the compounding period, and is the time in years.
 Synthesis

● How do you calculate a compound interest?

● How does knowing compound interest help you in your

decision-making regarding finances?

● How can you apply the concept of compound interest in

solving word problems?