COMPOUND INTEREST

> interest paid on increasing principal.

Example: P= 1000 ; invested for three years at 12.5% compounded interest.

1. Original principal 1,000

Interest year1 125
2. Principal at start of year2 1,125
Interest year2 140.625
3. Principal at start of year3 1,265.625
Interest year3 158.203
4. Amount at end of 3 years 1,423.828

Total compounded interest:__________ vs. simple interest:__________

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COMPOUND INTEREST FORMULA
where: F= final amount at compound interest
F= P(1+i)n
P= original principal
i= interest rate per compound period
j mt
F= P(1+ m ) __ n= total number of conversion period

*should know value of m, (frequency of conversion/compounding per year)

If monthly, m= 12
quarterly, m=___
semi-annually, m=___
annually, m=___

*when not stated, assume compounded annually

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 NOMINAL RATE
annual interest rate, J
With frequency conversion per year, m

J= mi and i =J
m
Examples:
________________________________________________________________________________
Nominal rate(J) Frequency of conversion interest rate per period
(annual interest rate) (conversion per period), m i= J / m___________________
12% compounded annually 1 .12
12% compounded semi-annually 2 .06
12% compounded quarterly 4 .03
12% compounded monthly 12 .01

• To find n, =mt
• Thus,
J mt
F= P(1+ m ) __

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Exercises:
1. Find: ( 1+ 3%)20 ; ( 1 + 7% )10

2. Find compound interest earned and compound amount due at the end of 5years if
php10,000 is invested at 12% compounded quarterly.
Given:
P= 10,000 ; t= 5years ; j= 12% ; m= 4 (quarterly)  i = j/m = .12/4 = .03
 n = mt = (4)(5) = 20

Solution:
F= P ( 1 + j / m ) mt

=10,000 ( 1 + .03 )20

= 10,000 (1.8061112)
= 18,061.11  F or the Amount due

= 18,061.11 – 10,000 = 8061.11 , Interest (if it’s being asked)

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 3. Accumulate 12,000 pesos for 10 years at 7% compounded
a.) Annually ; b.)semi- annually ; c.) quarterly ; d.) monthly
Given: P=12,000
t= 10 years
j= 7%
m= 1

Solution:
a.) m= 1
F= 12,000 ( 1 + .07)10 = 12,000 (___?____) = 23,605.82 … Interest 11,605.82

b.) m= 2
F= 12,000 ( 1 + .035)20 = ? = 23,877.47 … interest 11,877.47

c.) m= 4
F= 12,000 ( 1 + .0175)40 = ? = 24,019.17 … interest
12,019.17

d.) m= 12
F= 12,000 ( 1 + .07 / 12 )120 = ? = 24,115.94 … interest 12,115.94

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PRESENT VALUE AT COMPOUND INTEREST

Recall: for future value at compound interest,

F= P ( 1+i )n, solve for P
P= F , P= F ( 1+ i ) –n

(1+i ) n

A. Exercise for discount factor ( 1 + i ) –n

a. ( 1 + 3 ½%) -8
b. ( 1 + 2 ½%) -41

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b. Find the present value of php5,000 due in 4 years if money is
worth 7% compounded semi-annually.
Given: F= 5,000
t= 4 years
j= .07
‘ m= 2

Solution:
P=F ( 1 + J/m) –mt
=5,000 ( 1 + .07/2) –(2)(4)

= 5,000 (___?___)
=3,797.06

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c. Discount php15,500 for 10 years and 3 months at 10%
compounded quarterly and find the discount.
Given: F= 15,500
t= 10.25
J= 10%
m= 4

Solution:
a.) P= F ( 1 + j/m) –mt
=15,500 ( 1 + .10/4 ) -4(10.25) = - 41
= 15,500 (0.36335)
=5,631.88

b.) compounded discount (I = F – P)

= 15,500 – 5,631.88
= ?
=9,868.12

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Compound Interest Exercises

1. Find the compound amount and interest:

a. If Php 2,500 is invested at 13% compounded quarterly for 12 years
b. If Php 3,700 is invested at 12% compounded semi-anually for 5 years
c. If Php 12,000 is invested at 9% compounded monthly for 6 years.

2. Find the present value of Php 2,850 due in 5 years if money is worth 10% compounded
quarterly.

3. How much must be invested today in a savings account to realize Php 9,000 in 4 years, if
money earns at the rate of 4% compunded quarterly.

4. If Php 30,000 is invested at 11% compounded semi-annually, how much will it be in 8 years?

5 If P50,000 is invested at 9% compounded quarterly, how much will it be in 6 years?

6. How much must be invested today in a savings account to realize P100,000 in 6 years, if
money earns at the rate of 14% compunded semi-annually.
 PRESENT VALUE

Solve the following problems. Use scientific calculator or table III. Make use of time
diagram.
1. Discount P65,000 for 2 yrs and 9 months at 12% compounded quarterly.
2. If P275,000 is due in 4 yrs and 6months compounded semi-annually at 11%,
What is its present value?
3. A debt of 50,000 is due in 1 year and 8 months. If the debtor wishes to pay
his creditor today at 12% compounded semi-annually, how much would he
have to pay now?
4. If money is worth 10% compounded annually, find the present value of
P250,000 due at the end of 5 years and 3 months.
5. Discount P10,600 for 10 months at 18%, m=24.
6. Rex owes Ariel P35,000 due on march 01, 2002 what amount did Ariel
received if Rex have paid his debt on January 01, 2000
7. Discount P15,500 for 11 months compounded quarterly at 18%
8. Discount P145,000 at 18% compounded annually from august 15,1999 to
December 15, 2003.
9. On Sept. 05, 2000, Bing C. Ramirez discounted a note with an accumulated
amount of P178,950.56 (principal plus interest) due on December 05, 2002
at 15% compounded semi-annually, How much proceeds did Bing
received?
10. A) Accumulate P120,000 for 6 yrs and 8 months, m=4 at 16%
B) Discount the result at 18%, for 2 yrs and 10 months, m=4.