COMPOUND INTEREST:

COMPOUNDING MORE
THAN ONCE A YEAR
PREPARED BY: MR. JERRY MAE A. RANES
LEARNING OUTLINE:
1. compute maturity value, interest, and present
value when compound interest is compounding
more than once
 DEFINITION OF TERMS
1. Frequency of conversion (𝒎) – number of conversion
periods in one year.
2. Conversion or interest period (𝒏) – time between
successive conversions of interest. 𝑛 = 𝑚𝑡
3. Nominal rate (𝒊𝒎 ) – annual rate of interest
𝑖𝑚
4. Rate of interest for each conversion period (𝒋) – 𝑗 =
𝑚
 ILLUSTRATIVE EXAMPLE
𝒊 𝒎
𝒎 𝒊 𝒎 𝒏 = 𝒎𝒕 𝒋=
𝒎
𝟏
𝒊
annually 1 𝒊 𝟏 𝒏 = 𝟏𝒕 𝒋=
𝟏
𝟐
𝒊
semi-annually 2 𝒊 𝟐 𝒏 = 𝟐𝒕 𝒋=
𝟐
𝟒
𝒊
quarterly 4 𝒊 𝟒 𝒏 = 𝟒𝐭 𝒋=
𝟒
𝒊 𝟏𝟐
monthly 12 𝒊 𝟏𝟐 𝒏 = 𝟏𝟐𝒕 𝒋=
𝟏𝟐
𝒊 𝟑𝟔𝟓
daily 365 𝒊 𝟑𝟔𝟓 𝒏 = 𝟑𝟔𝟓𝒕 𝒋=
𝟑𝟔𝟓
 ILLUSTRATIVE EXAMPLE
𝒎
𝒎 𝒊
𝒎 𝒊 = 𝟐% 𝒕 𝒏 = 𝒎𝒕 𝒋=
𝒎
annually 1 5

semi-
2 5
annually

quarterly 4 5

monthly 12 5

daily 365 5
 ILLUSTRATIVE EXAMPLE
𝒎
𝒎 𝒊
𝒎 𝒊 = 𝟐% 𝒕 𝒏 = 𝒎𝒕 𝒋=
𝒎
annually 1 𝒊 𝟏 = 𝟐% 5 5 0.02

semi-
2 𝒊 𝟐 = 𝟐% 5 10 0.01
annually

quarterly 4 𝒊 𝟒 = 𝟐% 5 20 0.005

monthly 12 𝒊 𝟏𝟐 = 𝟐% 5 60 0.0016
𝟐%
daily 365 𝒊 𝟑𝟔𝟓
= 𝟐% 5 1825
𝟑𝟔𝟓
 MATURITY VALUE OF
COMPOUNDING M TIMES A YEAR
𝑛
𝐹 =𝑃 1+𝑗

Where: 𝐹 = maturity value

𝑃 = principal amount
𝑗 = rate of interest for each conversion period
𝑛 = conversion or interest period
 COMPOUND INTEREST
𝐼𝑐 = 𝐹 − 𝑃
𝐼𝑐 = 𝑃 1 + 𝑗 𝑛 − 1

Where: 𝐼𝑐 = compound interest

𝐹 = maturity value
𝑃 = principal amount
𝑗 = rate of interest for each conversion period
𝑛 = conversion or interest period
 EXAMPLE #1
Find the maturity value and interest if P10,000 is deposited in a
bank at 2% compounded quarterly for 5 years.

Answer: The maturity value is P11,048.96 and the interest is

P1,048.96.
 EXAMPLE #2
Find the maturity value and interest if P10,000 is deposited in a
bank at 2% compounded monthly for 5 years.

Answer: The maturity value is P11,050.79 and the interest is

P1,050.79.
 EXAMPLE #3
Cris borrows P50,000 and promises to pay the principal and
interest at 12% compounded monthly. How much must he repay
after 6 years?

Answer: Thus, Cris must pay P102,354.97 after 6 years.

 PRESENT VALUE
𝐹
𝑃= 𝑛
1+𝑗

Where: 𝐹 = maturity value

𝑃 = principal amount
𝑗 = rate of interest for each conversion period
𝑛 = conversion or interest period
 EXAMPLE #4
Find the present value of P50,000 due in 4 years if money is
invested at 12% compounded semi-annually.

Answer: The present value is P31,370.62.

 EXAMPLE #5
What is the present value of P25,000 due in 2 years and 6
months if money is worth 10% compounded quarterly?

Answer: The present value is P19,529.96.

 SEATWORK
Debbie wants to compare the simple interest to compound interest on a
P60,000 investment.

1. Find the simple interest if funds earn 8% simple interest for 1 year.
2. Find the interest if funds earn 8% compounded annually for 1 year
3. Find the interest if funds earn 8% compounded semi-annually for 1
year.
4. Find the interest if funds earn 8% compounded quarterly for 1 year.
5. Which is the best investment? Why?