GEN.

MATH
2 Quarter
nd
COMPOUND
INTEREST
 Objectives:
- define compound interest
- illustrate compound interest
- distinguish between a simple and compound
interest
- compute interest, maturity value, and present
value in compound interest environment
- Solve problems involving compound interest
Getting ready!
Complete the table below showing the amount needed in any one of the first
five years to pay off a loan of ₱20,000 at 8% per year at simple interest.

At the end of Principal Accumulated Interest Amount due

I = Prt A=P+I

1 year ₱20,000 ₱1,600 ₱21,600

₱20,000 ₱3,200 ₱23,200

2 years

3 years ₱20,000 ₱4,800 ₱24,800

4 years ₱20,000 ₱6,400 ₱26,400

5 years ₱20,000 ₱8,000 ₱28,000

Activity
Arthur borrows ₱40,000 at 6% simple interest for a period of one year. At
the end of one year, how much must he pay?

If Arthur did not pay back the loan or the interest by the end of the first year and he
wanted to continue the loan for another year at the same rate, then he would owe ₱40
000 plus the interest incurred during the first year of loan. How much must he pay at
the end of the second year?

If the same thing happens, that is, Arthur was not able to pay back the loan or the
interest by the end of the second year. The lender gave him another year under the same
condition, how much must he pay at the end of the third year?
 Developing Skills!

Principal at the
start of the year Interest Amount due

1 year ₱40,000.00 (40,000)(0.06)(1) = ₱2,400.00 ₱40,000 + ₱2,400 = ₱42,400.00

2 years (42,400)(0.06)(1) = ₱2,544.00 ₱42,400 + ₱2,544 = ₱44,944.00

₱42,400.00

3 years (44,944)(0.06)(1) = ₱2,696.64 ₱44,944 + ₱2,696.64 = ₱47,640.64

₱44,944.00

The problem in the activity is an example of COMPOUND INTEREST . For example,

₱40,000 was loaned for a period of 3 yrs. with interest compounded annually.

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, the interest paid is called COMPOUND INTEREST .
 Accumulated Amount of Compound Interest

When interest is compounded annually for t years, the amount

(or Accumulated/Future Value) A is
t
A = P (1+r)
Note:

Because interest is paid on interest, compound interest is always

greater than simple interest.
Example 1.

Find the compound amount on deposit at the end of 2 years if

₱20 000.00 is deposited at 4% compounded

a) annually

b) semi-annually
 In example 1b, the period (interval for compounding) is 6 months (semi-annual). There are
2 periods per year: the rate is:

per period

and the number of periods in t years is 2t

In General:

Where is called the PERIODIC RATE

 Periodic Rate per conversion Period

Annually: quarterly:

semi-annually: monthly:
 Example 2.
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

𝟏𝟐 % 12(4)
=𝟏% 𝒑𝒆𝒓 𝒎𝒐𝒏𝒕𝒉
𝟏𝟐

b) 10.2% compounded quarterly for 9 quarters

𝟏𝟎 .𝟐 %
=𝟐 . 𝟓𝟓 % 𝒑𝒆𝒓 𝒒𝒖𝒂𝒓𝒕𝒆𝒓 9
𝟒
Example 3
If ₱320,000 is invested for 5 years at 8% compounded quarterly, find
a) the compound amount (A); b) the compound interest

Example 4
What amount must be invested in order to have ₱128, 376.52 after 8
yrs. if money is worth 6% compounded semi-annually?
 Exercises
Ana deposits ₱100, 000 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
Principal
2. 5 years
time
3. 4.5%
annual rate
4. ₱155 296.94
compound amount/future value
5. ₱55 296.94
compound interest
 Application
I. Find the periodic rate if the rate is compounded as asked in the table below:

Annually Semi-annually Quarterly Monthly Daily

10%
8%
12%
11%
15%
 Application
I. Find the periodic rate if the rate is compounded as asked in the table below:

Annually Semi-annually Quarterly Monthly Daily

10% 10% 5% 2.5% 0.83% 0.03%
8% 8% 4% 2% 0.67% 0.02%
12% 12% 6% 3% 1% 0.03%
11% 11% 5.5% 2.75% 0.92% 0.03%
15% 15% 7.5% 3.75% 1.25% 0.04%
 Application

II. Find the future value of the indicated principal amount.

6. ₱30 000 at 8% compounded annually for 10 years.

7. ₱35 000 at 6% compounded semi-annually for 12 years.
8. ₱51 000 at 8.5% compounded quarterly for 8 years.
9. ₱12 500 at 7.75% compounded semi-annually for 12 years.
10. ₱152 000 at 9% compounded daily for 10 years.
 Application

III. Find the present value that will generate the indicated future
amount.

11. ₱43 000 at 10% compounded annually for 5 years.

12. ₱15 000 at 8% compounded semi-annually for 3 years.
13. ₱36 000 at 9.75% compounded monthly for 4 years.
14. ₱120 000 at 10.5% compounded quarterly for 6 years.
15. ₱80 000 at 7% compounded quarterly for 8 years.
IV. Answer the following:

16. Lauro deposited ₱64 600 in a savings account which pays 8%

interest compounded semi-annually. What will his balance be in
4 years?

17. Glenda deposits ₱5 000 in a savings account which pays 5%

compounded annually . The money is left for years. Find the
account balance at the end of 3 years.

18. Twenty thousand pesos is deposited in an account that pays 8%

interest. Find the account balance after 8 years if the interest is
calculated as follows:
a) compounded semi-annually c) simple interest
b) compounded quarterly
QUIZ!
1. Give the difference between simple interest and
compound interest. (10 pts)

2. A sum of money placed at compound interest

doubles itself in 5 years, how long it will become 8
times itself at the same interest rate? (15 pts.)
Application
A sum of money placed at compound interest doubles itself in 5 years, how long it will become
8 times itself at the same interest rate?
Annuity

is a sequence of payments
made at equal (fixed)
intervals or periods of time
Payment interval
is the time between successive
payments
- monthly
- 3 months or quarterly
- 6 months or semi-
annually
Examples of Annuities:

- rental payment
- Monthly pensions
- Monthly payments for car
loan, housing loan
- insurance, educational
plans, etc.
Classifications of annuity

According to ANNUITY
Simple Annuity
Payment Interval - an annuity where the
and interest period payment interval is the
same with the interest
period

Payment Interest
Interval Period

Compounded
monthly
Classifications of annuity

According to ANNUITY
Simple Annuity General Annuity
Payment Interval - an annuity where the - is an annuity where the
and interest period payment interval is the payment interval is not the
same with the interest same with the interest period
period

Payment Interest
Interval Period

semi-annually Compounded
semi-annually
Classifications of annuity

According to ANNUITY
Simple Annuity General Annuity
Payment Interval - an annuity where the - is an annuity where the
and interest period payment interval is the payment interval is not the
same with the interest same with the interest period
period

Payment Interest Payment Interest

Interval Period Interval Period

semi-annually Compounded Compounded

semi-annually semi-annually
 According to ANNUITY
Ordinary Annuity (or Annuity Annuity Due
Immediate)
According to time payment - a type of annuity in which the
- a type of annuity in which the payments are made at the beggining
payments are made at the end of of each payment interval
each payment interval

Example Example

If you get the item today you are If you get the item today then
going to pay next month. start paying now for your monthly
due.
According to ANNUITY
Annuity Certain Contingent Annuity
According to duration
- an annuity in which payment - an annuity in which the payment
begin and end at definite times extend over an indefinite (or
indeterminate) length of time

Example:

Pension – as long as you are alive

you are going to receive your
pension
Let us try!

Determine what kind of

annuity is represented by
each given situation.
 According to According to According to
Annuity interval and time of duration
Interest payments

1. Paying a debt every 6 months when the

interest is compounded semi-annually simple
2. Monthly installment payment of a car with an
interest rate that is compounded annually
general

3. Installment payment for an appliance at the

end of each month with interest compounded
monthly.

4. Catherine’s monthly mortgage payment is Php

17,500 at the end of each month ordinary
 According to According to According to
Annuity interval and time of duration
Interest payments

5. Thirdy’s apartment rent is Php8,000 and due

at the beginning of each month. Annuity due

6. Payments are made at the end of each month

for a loan that charges 1.05% compounded ordinary
quarterly

7. A deposit of Php 5, 500.00 was made at the

end of every three months to an account that simple
earns 5.6 interest compounded quarterly.

8. Jun’s monthly mortgage payment is Php35,

148.05 at the end of each month for 2 years. ordinary Annuity
certain
Abstraction:

Annuities Difference Category

Simple Annuity Payment interval = Interest Period Payment interval
General Annuity
and interest period
Payment interval ≠ interest period

Ordinary Annuity Payment End

Time
Annuity Due Beginning Payment
Annuity Certain
Fixed term (has definite end)
Contingent Annuity No definite time to end/finish
Duration
Choices: Fill in the blank with the correct term
1. An annuity in which payments begin and end at definite time is a/an
______________.
Annuity Annuity certain

2. An annuity where the payment interval is the same as the interest period is
General Annuity a/an____________
simple annuity
Ordinary Annuity 3. An annuity where the payment interval is not the same as the interest
period is a/an_____________.
Simple Annuity General annuity
4. Simple annuity which the payments are made at the end of each period is
a/an _________________
Annuity Certain
5. A sequence payment at equal periods is a/an_____ .
Contingent Annuity Annuity
Activity 2. Identify whether the given illustrates simple annuity or general annuity

1. A life insurance contribution paid monthly while the interest is compounded quarterly.
GENERAL
2. Your mom decided to join their office cooperative and agreed to contribute P1000 per month beginning January 2021
which will earn 3% compounded monthly.
GENERAL
3. Your parents are planning to save for their retirement. To do this they want to save a portion of their salaries and contribute
monthly for their retirement funds which will earn 5% compounded quarterly.
GENERAL
4. Your eldest brother applied for a term life insurance. His contribution per year is P40, 000 that earns 12% compounded
monthly for 20 years..
GENERAL
5. A college educational plan earns 4% compounded quarterly and payments are made quarterly.
SIMPLE
6. Gabriel deposited all his retirement pay with bank c which will earn 4% compounded quarterly and he had an auto-credit
arrangement of P20, 000 per month.
GENERAL
7. Sir Eli deposits P10,000 on January 20, 2020 and has deposited the same amount on the same date every month. The
China bank credits 2.4% interest compounded annually to Elli’s account.
GENERAL
 Across:
1. the current value of a future sum of
F money given a specified rate of return
C O M P O U N D 5. an interest computed on the principal and
T B
also, on the accumulated past interest
7. a person/institution who invest the
S
U O money or makes the funds available

I R R
8. length of time in years the money is
borrowed or invested
M E R 9. a date on which the money borrowed or
O loan is to be completely paid
P
P L V W
Down:
P R E S E N T V A L U E 2. an amount of money borrowed or
I
N I L invested on the origin date
R 3. interest that remain constant throughout
T N U the investment term
E 4. an amount after t years that the lender
C T E R M receives from borrower on a maturity
C R E D I T O R date
6. person who owes the money or avails of
P the funds from the lender
E
M A T U R I T Y D A T E 10. an amount paid or earned for the use of
S money
T L