COMPOUND AMOUNT OR FUTURE VALUE

Albert Einstein considered compound interest as the “ eighth wonder of the world “.
Compound interest works wonder over time because it allows individuals to earn interest not
only on the original amount that they invested, but earn interest also on the interest they
earned from that original investment.

According to Benjamin Franklin, “ money makes money and the money that money
makes, makes more money “.

Compound Interest – is an interest computed on an increasing principal.

- it is an interest on interest.
Compound Amount – is the sum of the principal and the compound interest.

Compound Amount Formula :

A = P(1 + i )n where : A = compound amount ( original amount borrowed plus the compound
interest)
P = principal ( original amount borrowed )
( 1 + i )n = accumulation factor whose value is always greater than 1.
i = interest rate per conversion or compounding period
n = total number of compounding periods
i = j/m where : j = nominal rate or the rate per year
m = number of compounding periods per year
m = 1 = annually – means the principal will earn interest once a year
m = 2 = semi-annually - means the principal will earn interest twice a year or
every 6 months.
m = 4 = quarterly - means the principal will earn interest every 3 months or
4 times a year.
m = 12 = monthly - means the principal will earn interest every month or 12
times a year.
n = m x t where : t = time or term of the loan
Example : Find the compound interest and compound amount of P50,000.00 invested at 12 %
compounded quarterly for 1 year.

Given Data : Principal = P50,000 n = m x t = 4 x 1 = 4

j = 12 % t = 1 year
m=4
i = j/m = 12%/4 = 0 .12/4 = 0.03 or 3 % - the rate to be used every
compounding period
n = 4 - means the computation of interest is every 3 months for 1 year.

1
Manual Calculation :

First quarter = P50,000.00 x 3 % ( 0.03 ) = P1,500.00

= P50,000 + P1,500.00
= P51,500.00
Second quarter = P51,500.00 x 3 % ( 0.03 ) = P1,545.00
= P51,500.00 + P1,545.00
= P53,045.00
Third Quarter = P53,045.00 x 3 % ( 0.03 ) = P1,591.35
= P53,045.00 + P1,591.35
= P54,636.35
Fourth quarter = P54,636.35 x 3 ( 0.03 ) = P1,639.09
= P54,636.35 + P1,639.09
= P56,275.44 - compound amount Compound Interest = A – P = P6,275.44
Tabular Method
Period Principal Rate Compound Interest Compound Amount
1St quarter P50,000.00 3% P1,500.00 P51,500.00
2nd quarter P51,500.00 3% P1,545.00 P53,045.00
3rd quarter P53,045.00 3% P1,591.35 P54,636.35
4th quarter P54,636.35 3% P1,639.09 P56,275.44
P6,275.44

Compound Amount = Principal + compound interest

= P50,000.00 + 6,275.44
= P56,275.44
Compound Interest = Compound Amount ( A ) - Principal = P6,275.44

Using the calculator

A = P ( 1 + i )n
= 50,000 ( 1.03 )4
= 50,000 (1.12550881)
= P56,275.44

How to obtain the table factor or accumulation factor

Press = /1.03 / xy / 4 / 50,000 / = / or Press = / P50,000/ x /( / 1.03 / ) /xy / 4 / = /

xy = yx = ▪ - they are just the same . This depends on the model of your calculator.
2
Activity
A – Direction : Supply the missing values using the formula.

Principal Term of Nominal Interest Compound Compound

Investment Rate Compounded Amount Interest
1. P120,000.00 2 years 12 % quarterly
2. P45,000.00 3 ½ years 10 % semi-annually
3. P68,000.00 4 years 8% annually
4. P250,000.00 1 yr. & 5 months 15 % monthly

B – Finding the compound amount and compound interest using the table.

Principal term j m i n Table Value C. A. C. I.

ex. P25,000.00 2 years 14 % quarterly 0.035 8 1.316809 32,920.22 7,920.22

1. P72,500.00 3 ½ yrs. 13 % semi-annually

2. P18,000.00 5 years 9% monthly

3. P94,000.00 6 years 6.5 % annually

Legend :
J = nominal rate or rate per year
m = number of compounding period/s or conversion period/s per year
n = total number of compounding periods for the entire term
i = j/m = interest rate per compounding period
C. A. = compound amount
C. I. = compound interest

C. – Problem Solving.
Direction : Solve each problem.
1. Ester Go borrowed P50,000.00 at 7.5 % compounded quarterly. How much will she pay at the end
of 5 years ?
2. Find the maturity value at the end of 8 years, if P300,000.00 is invested at 12 % compounded
monthly.
3. Abby Tan invested P400,000 for 10 years. The interest rate is 9 % compounded monthly. What is the
compound amount at the end of the term ?
4. Accumulate P20,000.00 for 12 years at 5 % per month.