COMPOUND INTEREST

LESSON OUTLINE

• Maturity value

• Present value
 MATURITY (FUTURE) VALUE AND
COMPOUND INTEREST
F = P(1+r)t

Where:
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/ time in years

The compound interest Ic = F-P

Example 1.

Find the maturity value and the compound interest if

P10,000 is compounded annually at an interest rate of 2%
in 5 years.

Given: P = 10,000 r = 2% = 0.02 t = 5 years

Find: (a) Maturity value - F

(b) Compound interest – Ic
 SOLUTION

(a) F = P(1+r)t
F = (10,000)(1+ 0.02)5
F = (10,000)(1.02)5
F = (10,000)(1.104080803)
F = 11,040.081 Answer: the future value (F) is
P11,040.81 and the compound
interest (Ic) is P1,040.81
(b) Ic = F - P
Ic = 11,040.81 – 10,000
Ic = 1,040.81
 EXAMPLE 2.

Find the maturity value and interest if P50,000 is invested

at 5% compounded annually for 8 years

Given: P = 50,000 r = 5% = 0.05 t = 8 years

Find: (a) Maturity value – F

(b) Compound interest - Ic
 SOLUTION
(a) F = P(1+r)t
F = (50,000)(1+ 0.05)8
F = (50,000)(1.05)8
F = (50,000)(1.477455444) Answer: the future value (F) is
P11,040.81 and the
F = 73,872.77 compound interest (Ic) is
P1,040.81
(b) Ic = F - P
Ic = 73,872.77 – 50,000
Ic = 23,872.77
 PRESENT VALUE (P) AT COMPOUND
INTEREST
P= F
_________ = F (1 + r)t
(1 + r)t
Where:
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/ time in years
 EXAMPLE 1.
What is the present value of P50,000 due in 7 years if
money is worth 10% compounded annually?

Given: F = 50,000 r = 10% = 0.1 t = 7 years

Find: P
 SOLUTION

The present value (P) can be obtained by

P __________
= F P = 25,657.91
(1 + r)t

P = ____________
50,000
(1 + 0.1)7
Answer: The present value is P25,657.91
P = ____________
50,000
1.9487171
 EXAMPLE 2.
How much money should a student place in a time deposit
in a bank that pays 1.1% compounded annually so that he
will have P200,000 after 6 years?

Given: F = 200,000 r = 1.1% = 0.011 t = 6 years

Find: P
 SOLUTION
The present value (P) can be obtained by

P_________
= F P = 187,293.65
(1 + r)t

Answer: the student should

P =_________
200,000
deposit P187,293.65
(1 + 0.011)6

P = ___________
200,000
1.067841841