COMPOUND INTEREST

Basic Business Mathematics

Interest
• It is an amount, usually money, that is added as a
charge on an investment or debt after some time
passed.

• It could be simple or compound.

Difference Between Simple and Compound Interest

SIMPLE COMPOUND
P= Php 2,000 r= 5% t=2 years P= Php 2,000 r= 5% t= 2years

F 1st year= P (1+rt)

F= P (1 + rt)
F 1st year= (Php 2,000) [1 + (5%)(1)]
F= (Php 2,000) [1 + (5%)(2)] F 1st year= Php 2,100
F = Php 2,200
F 2nd year= P (1+rt)
F 2nd year= (Php 2,100)[ 1+(5%)(1)]
F 2nd year= Php 2,205
COMPOUND INTEREST

F = P(1+ i
) nt I=F-P
n
I – Interest, amount that will be added or charged
P- Principal Amount, amount that is originally invested or loaned
F- Final Amount, total amount where the interest is added to the principal amount
i – annual rate of charge, percentage or condition about the investment or debt
t – term or time in years
n – number of compounding periods
Number of Compounding Periods
Compounding Frequency n
Annually 1
Semi-annually 2
Quarterly 4
Bi-monthly 6
Monthly 12
Example

A bank offers 0.25% semi-annual

compounding rate for a particular
deposit. How much will be the final
amount if 1 million pesos is deposited in
the savings account for 1 year?
Example

How much interest is charged when

Php50,000 is borrowed for 2 years at an
annual compounding rate of 10%?
Example

If an entrepreneur applies for a loan

amounting to Php500,000 in a bank, how
much will he need to pay after 5 years if
the bank offers a quarterly compounding
rate of 5%?
Example

Find the interest gained if 1 million pesos

is deposited in a bank at monthly
compound interest of 0.25% after (a) 1
year (b) 5 years?
Example

You filed for a loan to a bank amounting

Php 40,000 with a bi-monthly
compounding interest rate of 1%. How
much should you pay after 2 years?
Example

How much interest would you get for a

debt of Php 1.00 if it was subjected to a
monthly compounding rate 5% after 100
years?
Seatwork
1. How much money will you get after 3 years if you saved
in a bank Php5.00 subjected to bi-monthly
compounding rate 10%?
2. How much interest will an entrepreneur incur after 5
years if he got a debt of Php1,500,000 with a condition
of 1% quarterly compounding rate?
3. If a mother deposited Php 30,000 in a savings account
with a monthly rate of 2% for her 10-year old daughter,
how much money will her daughter get in her debut?