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Compound Interest Application: Learner's Module in General Mathematics
Compound Interest Application: Learner's Module in General Mathematics
COMPOUND INTEREST
APPLICATION
Learner's Module in General Mathematics
Quarter 2 ● Week 2
FLORENCE D. PALASI
Developer
Department of Education • Cordillera Administrative Region
Published by:
Learning Resources Management
and Development System
COPYRIGHT NOTICE
2020
“No copyright shall subsist in any work of the Government of the Philippines.
However, prior approval of the government agency of office wherein the work is
created shall be necessary for exploitation of such work for profit.”
This material has been developed for the implementation of K-12 Curriculum
through the Curriculum Implementation Division (CID) - Learning Resources
Management and Development System (LRMDS). It can be reproduced for
educational purposes and the source must be acknowledged. Derivatives of the work
including creating an edited version, an enhancement or a supplementary work are
permitted provided all original work is acknowledged and the copyright is attri buted.
No work may be derived from this material for commercial purposes and profit.
ii
PREFACE
iii
ACKNOWLEDGMENT
The developer wishes to express her gratitude to those who helped in the
development of this learning material. The fulfillment of this learning material would
not be possible without them.
Thanks to those who gave moral and technical support in the crafting of this
learning module. To her colleagues in school for sharing their knowledge and
expertise as she develops this learning resource. Lastly, to the office of DepEd
Division of Baguio City for giving her the opportunity to discover her skills as a module
writer.
CONSULTANTS
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TABLE OF CONTENTS
Page
Copyright Notice ………………………………………………….……...….…….….…ii
Preface …………………………………………………………………...………………iii
Acknowledgement……………………………………………………. …….………..…iv
Table of Contents……………………………………………………….……. …..….…v
Title Page…………………………………………………………………………………1
What I Need to Know ……………………………………………………………..….…2
What I Know………………………………………………………………….…….….…3
What’s In……………………………………………………………………………….…4
What’s New…………………………………………………………………………….…4
What Is It……. ……………………………………….……………….……………….…4
What’s More……. ……………………………………...…..…………………….….…12
What I Have Learned……………………………………………………..……...….…13
What I Can Do…….………………………………………………...………………..…13
Post-Assessment …………………..…………………………………………….….…13
Additional Activities……………………………...……………….……………….….…14
Answer Key………………………………………………..………………………….…15
References…….…………………………………………………...…….…….….….…16
v
Compound Interest
Application
Learner's Module in General
Mathematics
Quarter 2 ● Week 2
FLORENCE D. PALASI
Developer
Department of Education • Cordillera Administrative Region
1
What I Need to Know
Welcome to this module on COMPOUND INTEREST!
This module is intended to help you, learners, understand and master the compound
interest. It is designed to equip you with essential knowledge about the said topic and
skills on finding the maturity value, future value, and present value including solving
problems involving compound interest.
This module contains several lessons. To make the most out of it, you need to do the
following:
1. Scan the list of Learning Objectives to get an idea of the knowledge and skills you
are expected to gain and develop as you study the module. These outcomes are
based on the content standards, performance standards, and learning competencies
of the K to 12 Curriculum General Mathematics.
2. Take the What I Know. Your score will determine your knowledge of the lessons in
the module. If you get 100% of the items correctly, you may proceed to the next
module. Otherwise, you must go through the lessons.
3. Each Lesson aims to develop one of the learning objectives set for the module. It
starts with an activity that will help you understand the lesson and meet the required
competencies.
4. Take your time in reading this module. Write down points for clarification. You may
discuss these points with your teacher.
5. Perform all activities and answer all worksheets. The activities and assessments
are designed to enhance your understanding of compound interest. The activities will
also give you an idea how well you understand the lessons. Review the lessons if
necessary, until you have achieved a satisfactory level of understanding.
6. At the end of the module, take the Post-Assessment to evaluate your overall
understanding about the lessons.
Learning Objectives
At the end of the module, you should be able to:
1. compute interest, maturity value, future value, and present value in compound
interest environment; and
2. solve problems involving compound interests.
2
What I Know
This part is designed to assess your prior knowledge on compound interest. Read and
understand then write the letter of your answer on your answer sheet. Answer honestly
without any reference. The use of a calculator is allowed.
3
Compound Interest Application
What’s In
You have learned in your previous module about simple interest and compound
interest. Recall the previous topic by answering the activity below.
Match the terms in column A with the correct definitions in column B. Write the letter
of your answer on your answer sheet.
Column A Column B
1. Principal A. It is the time that the money is borrowed.
2. Term B. It is the amount paid or earned for the use of money.
3. Interest C. It is the percentage of increase of investment.
4. Maturity Value D. It is the amount received on repayment date.
5. Rate E. It is the amount of money borrowed or invested.
What’s New
As it was mentioned above, compound interest was introduced in the previous
module. This module will further discuss compound interest. Before you proceed to the
discussion, you are asked to answer the question below. Write your answer on your answer
sheet.
What number am I?
What Is It
To better understand compound interest, study lessons 1 to 4.
To compute for the future value or maturity value of an amount compounded once or
more than once a year, we use F = P(1 + j ) .
n
4
i
Where: j = , the interest rate per conversion period
m
i = nominal rate or annual interest rate
n = mt , refer to number of times that interest is compounded
m = frequency of conversions
F = future value or maturity value
P = principal or present value
From this formula, derive the formula of the present value. That is,
F = P(1 + j ) n
F P(1 + j ) n
=
(1 + j ) n (1 + j ) n
F
P= or P = F (1 + j ) − n
(1 + j ) n
Examples of nominal rates and the interest rate per conversion period with the
corresponding frequencies of conversion:
Examples:
1. A STEM student who got a scholarship asked his mom to keep the stipend given to him
quarterly. After he finished senior high school, he realized that he saved ₱50,000.00. He then
decided to deposit in a bank that offers 3% compounded monthly. How much will be his
money after 10 years? How much did he earn?
Given: P = 50,000.00 i = 0.03 t = 10 m = 12
Unknown: Maturity value ( F ) and interest ( I c )
Solution:
a. Compute for the interest rate in a conversion period.
i 0.03
j= = = 0.0025
m 12
5
c. Compute for the maturity value.
F = P(1 + j ) n
F = 50,000.00(1 + 0.0025)120 Substitute the given
F = 67,467.68 Multiply
The maturity value after 10 years is ₱67,467.68.
d. Compute for the compound interest.
I c = F − P = 67,467.68 − 50,000.00 = 17,467.68
The amount earned after 10 years is ₱17,467.68.
2. An automotive student learned about business loan in General Mathematics. After which,
he started to plan a business. After finishing grade 12, he went to a bank and borrowed
₱100,000.00 and promised that he will pay the principal with an interest of 12% compounded
quarterly. After 6 months, he was able to pay everything in cash. How much did he repay?
6
Given: P = 100,000.00 i = 0.12 t= = 0.5 m=4
12
Unknown: Maturity value ( F )
Solution:
a. Compute for the interest rate in a conversion period.
i 0.12
j= = = 0.03
m 4
b. Compute for the total number of conversion periods.
n = mt = 4(0.5) = 2
c. Compute for the maturity value.
F = P(1 + j ) n
F = 100,000.00(1 + 0.03) 2 Substitute the given
F = 106,090.00 Multiply
The total amount he paid after 6 months is ₱106,090.00.
3. A Home Economics student borrowed money from a cooperative because she wants to
start a business by baking cakes. She chose to pay her loan in lump sum. After 3 years, she
went to the cooperative and paid ₱120,405.75. She was charged 3% compounded semi-
annually. How much money did she borrow?
Given: P = 120,405.75 i = 0.03 t =3 m=2
Unknown: Present value ( P )
Solution:
a. Compute for the interest rate in a conversion period.
i 0.03
j= = = 0.0075
m 4
b. Compute for the total number of conversion periods.
n = mt = 2(3) = 6
c. Compute for the present value.
P = F (1 + j ) − n
P = 120,405.75(1 + 0.0075) −6 Substitute the given
P = 115,126.92 Multiply
The amount she borrowed was ₱115,126.92.
4. An engineer, who has a project, borrowed money from an individual lender. He paid
₱250,000.00 after 45 days. The money is worth 5% compounded daily.
6
45 9
Given: P = 250,000.00 i = 0.05 t= = m = 365
365 73
Unknown: Present value ( P )
Solution:
a. Compute for the interest rate in a conversion period.
i 0.05
j= = = 0.00014
m 365
b. Compute for the total number of conversion periods.
9
n = mt = 365( ) = 45
73
c. Compute for the present value.
P = F (1 + j ) − n
P = 250,000.00(1 + 0.00014 ) −45Substitute the given
P = 248,430.06 Multiply
The amount that the engineer borrowed was ₱248,430.06
n 188
Since n = mt , then t = = = 15.67 years.
m 12
It will take 188 months or 15.66 years for ₱5,000.00 to accumulate up to ₱8,000.00 at 3%
compounded monthly.
2. How long will it take ₱50,000.00 to earn ₱10,000.00 if the interest rate is 2% compounded
quarterly?
Given:
0.02
F = 60,000.00 P = 50,000.00 i = 0.02 m=4 j= = 0.005
4
7
Unknown: Time ( t )
Solution: F = P(1 + j )
n
n 37
Since n = mt , then t = = = 9.25 years.
m 4
It will take 37 quarters or 9.25 years for ₱50,000.00 to earn ₱10,000.00 at 2% interest
compounded quarterly.
Example:
Type of deposit Required Required daily Interest rate (per annum)
account initial deposit balance to earn
interest
Easy Savings ₱100.00 ₱1,000.00
ATM Savings ₱2,000.00 ₱5,000.00
Passbook Savings ₱5,000.00 ₱8,000.00
None for less than
Advanced Savings ₱100,000.00 ₱100,000.00 ₱100,000.00
1% for ₱100,000 to
₱499,999.00
1.5% For ₱500,000.00 and
above
Example Problems:
1. At what nominal rate compounded semi-annually will ₱20,000.00 accumulate to
₱30,000.00 in 5 years?
Given:
F = 30,000.00 P = 20,000.00 t =5 m=2 n = 2(5) = 10
Unknown: Nominal rate or annual rate ( i )
Solution: F = P(1 + j )
n
8
1 1
10
1.5 10
= (1 + j ) 10
Make the exponent of the right side of the
equation to 1 by multiplying its reciprocal
1
1.5 10 − 1 = j Apply addition property of equality
1
i
To compute the nominal rate (annual rate of interest), use j = . Hence,
m
i
0.0414 = Substitute the given
2
i = 0.0828 Cross multiply
i = 8.28% Multiply by 100%
2. A GAS student who is having a part time job in mining borrowed money from a vegetable
vendor. He promised that he will double the money in 3 years and it is compounded quarterly.
What is the interest rate?
Given: F = 2 x P=x t =3 m=4 n = 4(3) = 12
Unknown: Nominal rate or annual rate ( i )
Solution: F = P(1 + j )
n
Formula
2 x = x(1 + j ) 12
Substitute the given
2 x x(1 + j )12
= Divide both sides of the equation by the coefficient
x x
1 1
12
2 12
= (1 + j ) 12
Make the exponent of the right side of the equation to 1.
1
2 12
−1= j Apply addition property of equality
j = 0.0595 Simplify
j = 5.95% Multiply by 100%
The interest rate in each conversion period is 5.95%.
9
Lesson 4. Converting One Interest Rate to an Equivalent Interest
Rate
Definition of Terms
1. Equivalent rates – two annual rates with different conversion periods that will earn the
same compound amount at the end of a given number of years.
2. Nominal rate – annual interest rate (may be compounded more than once a year).
3. Effective rate – the rate compounded annually that will give the same compound
amount as a given nominal rate; denoted by i .
Example:
1. What effective rate is equivalent to 5% compounded semi-annually?
Given:
P1 = P1 t1 = t1 m1 = 1 ___compounded annually
P2 = P2 t2 = t2 m2 = 2 i2 = 0.05 5% compounded semi-annually
Unknown: Effective rate ( i1 )
Solution: Since the equivalent rates yield the same maturity value, then
F1 = F2
i1 m1t1 i
P1 (1 + ) = P2 (1 + 2 ) m2t2 Substitute the formula of F
m1 m2
i i
(1 + 1 ) m1t1 = (1 + 2 ) m2t2 Divide both sides by P
m1 m2
i i 1
(1 + 1 ) m1 = P(1 + 2 ) m2 Raise both sides to
m1 m2 t
2
i 0.05
(1 + 1 )1 = 1 + Substitute the given
1 2
1 + i1 = 1.050625 Simplify
i1 = 1.050625 − 1 Apply addition property of equality
i1 = 0.050625 Deduct 1
i1 = 5.06% Multiply by 100%
Hence, the effective rate equivalent to 5% compounded semi-annually is 5.06%.
2. Complete the table below:
Given Interest Rate Equivalent Interest Rate
a. 10% compounded monthly __________ compounded quarterly
b. 8% compounded quarterly __________ compounded semi-annually
a. Given:
P1 = P1 t1 = t1 m1 = 12 i1 = 0.10 10% compounded monthly
P2 = P2 t2 = t2 m2 = 4 ___compounded quarterly
10
i1 m1t1 i
P1 (1 + ) = P2 (1 + 2 ) m2t2 Substitute the formula of F
m1 m2
i i
(1 + 1 ) m1t1 = (1 + 2 ) m2t2 Divide both sides by P
m1 m2
i i 1
(1 + 1 ) m1 = P(1 + 2 ) m2 Raise both sides to
m1 m2 t
12 4
0.10 i
1 + = 1 + 2 Substitute the given
12 4
1 1
12 4
0.10 4 i 4 1
1 + = 1 + 2 Multiply to the exponents of both sides of the
12 4 4
equation
3
0.10 i
1 + −1 = 2 Apply addition of equality
12 4
i2
= 0.025208912 Simplify
4
i2 = 10.08% Cross multiply then multiply 100%
b. Given:
P1 = P1 t1 = t1 m1 = 4 i1 = 0.08 8% compounded quarterly
P2 = P2 t2 = t2 m2 = 2 ___compounded semi-annually
11
i2
= 0.0404 Simplify
2
i2 = 8.08% Cross multiply then multiply 100%
What’s More
Now that you have understood compound interest under “What Is It”, you are ready
to answer the following activities:
Activity 1. Fill in the blanks with the correct answers. Show your solutions on your
answer sheet. You are not allowed to use a calculator.
Activity 2. Identify the given then solve for the unknown. Show your solution on your answer
sheet. You may use your calculator.
Assessment 1. Complete the table by computing for the following equivalent rates.
Show your solutions on your answer sheet. Round off your answer to 2 decimal places. You
may use your calculator.
Assessment 2. Identify the given then find for the unknown. Show your solutions on your
answer sheet. The use of a calculator is allowed.
12
1. Your father borrowed an amount of ₱45,000.00 which he paid an interest of
₱4,000.00 at the end of 2 years. At what nominal rate compounded quarterly was
it invested?
2. Your grandfather needs ₱20,000.00 to pay the tax of his land. However, he has
only ₱15,000.00 on hand. He then decided to deposit the amount in a cooperative that
offers 2% compounded semi-annually. How long will it take to have the certain amount
he needs?
What I Can Do
Create a compound interest problem through a song. From this problem, solve for
the unknown on your answer sheet. Show your solution.
Post-Assessment
This part aims to assess what you have understood about the lesson. Read and
understand each item carefully. You are encouraged to answer honestly without any
reference. Write the letter of your answer on your answer sheet.
13
4. Which of the following is FALSE?
A. If you will choose the first account, you will earn ₱31,396.51.
B. If you will choose the second account, you will earn ₱31,396.51.
C. The future value for the first account is ₱121,396.51
D. The future value for the second account is ₱124,237.78
5. How much is the compound interest if you will choose the second account?
A. ₱34,237.78 B. ₱34,396.51 C. ₱121,396.51 D. ₱124,237.78
For items, 6-10, complete the table below by choosing the letter of the correct answer after
computation and write it on your answer sheet.
Additional Activities
These additional problems are prepared for you to have more practice on solving
problems involving compound interest.
1. How much should your mom set aside and invest in a fund earning 3% compounded
quarterly if she needs ₱85,000.00 in 20 months?
2. How much time is needed for money to triple if invested at 9% compounded semi-annually?
3. At what annual interest rate compounded semi-annually will a certain amount triple itself in
20 years?
14
15
Pre-test
1. B
2. D
3. D
4. B
5. C
6. A
7. C
8. C
9. A
10. D
What’s In
1. E
2. A
3. B
4. D
5. C
What’s New
P1,000,000
What’s More
Activity 1
1. 12
2. 6%
3. 4%
4. 22
5. Quarterly
Activity 2
1. ₱735,134.28
2. ₱67,814.78
3. ₱24,242.52
Assessment 1
1. 3.01%
2. 1.99%
Assessment 2
1. 4.28%
2. 14.5 years
Post-assessment
1. D
2. C
3. D
4. B
5. A
6. B
7. D
8. C
9. A
10. C
Additional Activities
1. ₱80,869.59
2. 5.57%
3. 12.5 years
Answer Key
REFERENCES
Department of Education (2016). General Mathematics Learner’s Material (1st Edition)
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