Compound Interest

1.4  Compound Interest

• Compound interest – a type of interest which
results from the periodic addition of simple
interest to the principal.
• This type of interest often applies to savings
accounts, loans, and credit cards.
• Compound amount – the amount at the end
of the term (after several compounding).
• It is the sum of the original principal and its
compound interest.

1.4  Compound Interest

• Formula for the compound amount F:
n
F = P(1+ i)

P - original principal
j - rate of interest per year
m - frequency of conversion
j
i - interest rate per priod; i = m

t - length of term in years

n - total number of conversion periods; n = tm

1.4  Compound Interest

Example. Find the compound amount at the end
of 12 periods if the principal is Php25,000 and
the interest per period is 10%.
n
F = P(1+ i)
= 25,000(1+ .10) 12

F = Php78,460.71

1.4  Compound Interest

Example. What is the maturity value of a
75,000-peso, three-year investment earning
5% compounded monthly?
n
F = P(1+ i)
12
= 75,000(1+ .05
12 )
F = Php87,110.42

∆ο τηισ ιφ
i is not exact.

1.4  Compound Interest

Example. Find the compound amount after 5
years and 9 months if the principal is
Php150,500 and the rate is 7% compounded
annually.
n
F = P(1+ i)
5 129 ×1
= 150,000(1.07)
= Πηπ221,333.92

1.4  Compound Interest

More Formulas:

P = F(1+ i) - n

é 1 ù
êæF ön ú
j =m ç ÷ -1
êè P ø ú
ë û

log( FP )
n=
log(1+ i)

1.4  Compound Interest

1. Given P = Php25,200, i = 3%, n = 16, find F.

F = P(1+ i) n
= 25,200(1.03)16
= Πηπ40,438.60

1.4  Compound Interest

3. Given P = Php1.8M, j = 11%, t = 7.5 years,
m = 2, find F.

F = P(1+ i) n
= 1,800,000(1.055)15
= Πηπ4,018,457.69

1.4  Compound Interest

5. Given F = Php46,000, j = 12%, t = 6.25 years,
m = 12, find P.

-n
P = F(1+ i)
= 46,000(1.01) - 75

= Πηπ21,809.96

1.4  Compound Interest

7. Given F = Php56,471.27, P = Php25,000,
t = 8 years 3 months, m = 4, find j.

é 1 ù é 1 ù
êæF ön ú êæ56,471.27 ö33 ú
j =m ç ÷ -1 =4 ç ÷ -1
êè P ø ú êè 25,000 ø ú
ë û ë û
= 10%

1.4  Compound Interest

11. Given F = Php34,500, P = Php30,000,
j = 15%, m = 12, find n.

log( FP ) log( 34,500

30,000 )
n= = = 11.25 periods
log(1+ i) log(1.0125)

1.4  Compound Interest

13. Given F = Php72,157.25, P = Php48,200,
j = 9%, m = 12, find n.

log( FP ) log( 72,157.25

48,200 )
n= = = 54 periods
log(1+ i) log(1.0075)

1.4  Compound Interest

23. Find the compound amount due in 6 years
and 2 months if Php350,000 is invested at 12%
compounded monthly.

F = P(1+ i) n
= 350,000(1.01) 74

= Πηπ730,886.10

1.4  Compound Interest

27. How much must Ella deposit in a bank that
pays 11% compounded quarterly so that she
will have Php400,000 after 4 years?
-n
P = F(1+ i)
= 400,000(1.0275) - 16
= Πηπ259,149.70

1.4  Compound Interest

28. A personal computer was bought on
installments – Php5,000 downpayment and
the balance of Php22,000 in 2 years. What is
the cash price if the interest rate is 20%
compounded quarterly?
P = F(1+ i) - n = 22,000(1.05) - 8 = Πηπ14,890.47

CP = DP + P = 5,000 +14,890.47 = Πηπ19,890.47

1.4  Compound Interest

30. On April 15, 2011, Justin borrowed Php1.4M.
He agreed to pay the principal and the
interest at 8% compounded semi-annually on
July 15, 2016. How much will he pay then?
F = P(1+ i) n
10 12
= 1,400,000(1.04)
= Πηπ2,113,382.46

1.4  Compound Interest

33. At what rate converted quarterly will
Php30,000 become Php40,000 in 7 years?

é 1 ù é 1 ù
êæF ön ú êæ40,000 ö28 ú
j =m ç ÷ -1 =4 ç ÷ -1
êè P ø ú êè 30,000 ø ú
ë û ë û
= 4.13%

1.4  Compound Interest

37. If Php80,000 is invested at the rate of 6 ½%
compounded annually, when will it earn
interest of Php15,000?

log( FP ) log( 95,000

80,000 )
t= = = 2.73 years
m log(1+ i) log(1.065)

1.4  Compound Interest

• Equation of values – a mathematical statement
which says that the dated values of two sets of
amounts are equal when brought to a particular
point in time (the comparison date).
• In the context of borrowing, the equation of
values says that
obligations = payments
• These sums are obtained by either accumulating
or discounting the debts incurred or the
payments made toward the comparison date.

1.4  Compound Interest

45. What single payment at the end of 6 years would
replace the following debts?
a) Php29,000 due in 1 year without interest
b) Php690,000 due in 8 years at 14% compounded
quarterly
Money is worth 8.5% effective.

29,000 690,000(1.035) 32
Obligation(s)
Payment(s) 1 6 8
x

1.4  Compound Interest

 29,000 690,000(1.035) 32
Obligation(s)
Payment(s) 1 6 8
x

29,000(1.085) 5 + 690,000(1.035) 32 (1.085) - 2 = x

x = Php1,805,909.97

1.4  Compound Interest

47. For an amount borrowed from a credit cooperative,
Janice needs to pay Php100,000 in 5 years. After 2 ½
years , she made a Php50,000 payment. If money is
worth 8% compounded semi-annually, how much
would she have to pay on the 5th year to fully settle
the loan?
100,000

Obligation(s)
Payment(s) 2.5 5
50,000 x

1.4  Compound Interest

 100,000

Obligation(s)
Payment(s) 2.5 5
50,000 x

100,000 = 50,000(1.04) 5
+x
x = Php39,167.35

1.4  Compound Interest

49. If money is worth 8% effective, what single
payment in 5 years will repay the following two
debts:
a) Php125,000 due at once
b) Php500,000 due in 8 years
125,000 500,000

Obligation(s)
Payment(s) 1 5 8
x

1.4  Compound Interest

 125,000 500,000

Obligation(s)
Payment(s) 1 5 8
x

125,000(1.08) 5 + 500,000(1.08) - 3 = x
x = Php580,582.13

1.4  Compound Interest

51. As payments for debts of Php300,000 due at the
end of 4 years and Php485,000 at the end of 8 years,
Jane agrees to pay Php50,000 at once and
Php250,000 at the end of 5 years. She will make a
third and final payment at the end of 10 years. How
much would it be if money is worth 14%
compounded semi-annually.

300,000 485,000

Obligation(s)
Payment(s) 1 4 5 8 10
50,000 250,000 x
1.4  Compound Interest
 300,000 485,000

Obligation(s)
Payment(s) 1 4 5 8 10
50,000 250,000 x

300,000(1.07) + 485,000(1.07) =
12 4

50,000(1.07) 20 + 250,000(1.07)10 + x
x = Php626,121.48

1.4  Compound Interest