Science, Technology, Engineering and Mathematics

General Mathematics
SY 2023 – 2024

Unit II: Business Mathematics

Lesson #2.3: Compound Interest

Introduction

Directions: Complete the table below by calculating the amount of interest earned per compounding
period. The first two rows are done for you.

Year Principal Rate Interest earned Maturity Value (new principal)

1 5,000 0.02 5,000(0.02)(1) = 100 5,000 + 100 = 5,100
2 5,100 0.02 5,100(0.02)(1) = 102 5,100 + 102 = 5,202
3
4
5
Interest is said to be compound if the interest is calculated from the principal and its accumulated past
interests. The above calculations illustrate an amount kept at 2% interest rate compounded annually.

Learning Objectives
At the end of this lesson, you will be able to:
 differentiate the concepts of simple and compound interest;
 distinguish compound interest formula to be used in different problems;
 perform the step-by-step process [GRESA] of solving compound interest problems

Lesson 2.3 – Compound Interest

A. Definition of terms

 Interest (I) - amount paid or earned for the use of money.

Compound Interest (𝑰𝒄 ) - interest that is computed from the principal and on the accumulated
past interests.
 Principal or present value (P) - amount of money borrowed or invested on the origin date.
 Rate (r) - annual rate charged by the lender or the rate of increase of the investment.
 Time or term (t) - length of time in years the money is borrowed or invested.
 Frequency of compounding (m) – number of compounding periods per year.
 Maturity/future value or compound amount (A) - amount after t years that the lender receives
from the borrower on the maturity date.

B. Maturity Value (Annually, More Than Once a Year, and Continuously)

Annually More Than Once a Year Continuously where

𝑟
𝐴 𝐴 = 𝑃 1+ 𝐴 = 𝑃𝑒 𝐴 is the compound amount
𝑛
= 𝑃(1 𝑃 is the present value

+ 𝑟) 𝑟 is the annual interest rate

𝑛 is the compounding frequency per
year
Compound Interest, 𝐼 = 𝑃 − 𝐴
𝑡 is the term of the loan or investment

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 Science, Technology, Engineering and Mathematics
General Mathematics
SY 2023 – 2024

Example 1: Calculate the compound interest of an investment of P1.2M at a rate of 3% compounded

annually after 10 years.

Given: P = P1.2M; r = 0.03; t = 10 yrs

Required: Compound Interest, 𝐼

Equation: 𝐴 = 𝑃(1 + 𝑟) and 𝐼 = 𝐴 − 𝑃

Solution:

𝐴 = 1,200,000(1 + 0.03) = 1,612,699.66

𝐼 = 1,612,699.66 − 1,200,000 = 412,699.66

Answer: The compound interest of the investment amounts to Php 412, 699.66.

Example 2: What is the maturity value of a P100,000-fund compounded quarterly at 2.8% after 5
years?

Given: P = P100,000; r = 0.028; t = 5 yrs; n = 4

Required: Maturity Value, 𝐴

Equation: 𝐴 = 𝑃 1 +

Solution:
( )
0.028
𝐴 = 100,000 1 + = 114,971.29
4

Answer: The fund will mature to an amount of Php 114,971.29 after 5 years.

Example 3: What is the value of an investment amounting to P840,000 compounded continuously at

4.5% after 11 years?

Given: P = P840,000; r = 0.045; t = 11 yrs

Required: Maturity Value, 𝐴

Equation: 𝐴 = 𝑃𝑒

Solution:
. ( )
𝐴 = 840,000𝑒 = 1,378,018.52

Answer: The investment will have a maturity value Php 1,378,018.52 after 11 years.

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 Science, Technology, Engineering and Mathematics
General Mathematics
SY 2023 – 2024

C. Present Value

Annually
𝐴
𝑃=
(1 + 𝑟)
where
More Than Once a Year 𝑃 is the principal amount or present value

𝐴 𝐴 is the compound amount or maturity value

𝑃= 𝑟 is the annual interest rate
𝑟
1+𝑛
𝑛 is the compounding frequency per year
Continuously 𝑡 is the term of the loan or investment
𝐴
𝑃=
𝑒

Example 4: How much should be invested for an amount of Php2M after 9 years if the interest offered
is 5% compounded semi-annually?

Given: 𝐴 = 2 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑝𝑒𝑠𝑜𝑠 𝑟 = 5% 𝑜𝑟 0.05 𝑡 = 9 𝑦𝑒𝑎𝑟𝑠 𝑛=2

Required: Present Value, 𝑃

Equation: 𝑃 =

Solution:
2,000,000
𝑃= ( )
= 1, 282,331.82
0.05
1+ 2

Answer: Approximately Php1,282,331.82 should be invested to get an amount of Php2M in 9 years.

Example 5: Calculate the present value of P100,000 from a fund compounded continuously for 7
months at 2.6% interest rate.

Given: 𝐴 = 100,000 𝑝𝑒𝑠𝑜𝑠 𝑟 = 2.6% 𝑜𝑟 0.026 𝑡= years

Required: Present Value, 𝑃

Equation: 𝑃 =

Solution:
100,000
𝑃= = 98,494.78
.
𝑒

Answer: The present value is Php98,494.78.

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 Science, Technology, Engineering and Mathematics
General Mathematics
SY 2023 – 2024

Exercise: Analyze and solve for what is asked

1. How much loan should an entrepreneur avail to grow a capital of Php500,000 in 2 years if the
interest rate 7% is compounded semi-annually?
2. If you invest P25,000 in an account offering an annual interest rate 5.2% compounded monthly,
how much interest will you earn after 4 years?
3. What is the value of a P5,000-fund with rate 3.2% compounded continuously after 8 years?

Enrichment Activity

Approximate the number of years it will take to grow P5,100 to P7420 from a fund that is compounded
continuously at a rate of 1.5% for 2 years.

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