SENIOR HIGH SCHOOL

Compound Interest
Learning Goals
At the end of the lesson, the student is able to:

1 Compute interest, maturity value, and present value in compound interest environment,
and solve problems involving compound interest.

TIME FRAME: 90 minutes

 Compound Interest
interest that is computed on the principal and on the
accumulated past interests from previous periods
Compound Interest
 In compounding
Time or Term – interest,
amount theof time in years
interest the money
is added to the is borrowed
previous or invested;
principal length
at regular of time and
intervals, between the
the sum
origin
becomes and the
maturity
new dates.
basis for computing interest. Thus, the interest earned at a certain time interval is
automatically
 Principal – amountreinvested to yield
of money more interest.
borrowed or invested as capital on the origin date.
 Rate – annual Bankrate, usually in percent, charged by the lender, or rate of increase of the investment.
 𝑃  𝑟
 Compound Interest – interest that is computed on the principal and on the accumulated
  Amount past interests
after years
  Time   Principal Compound Interest
from previous periods.
 Maturity Value or Future
𝑃Value
( 1+–𝑟amount after years; (that )the
0 lender receives from the borrower 1 on the
  1  ₱ 𝑃
10,000 𝑃𝐼
)0 (  10,000
𝑃𝑟 𝑃𝑟
=( 1+ 𝑃𝑟𝑡
) ( 0.02𝑟1 )=200 )𝑟  𝐹₱
𝐹
𝑃
𝑃
𝑃 (= 10,200
= 𝑃
1+
(1+
(1+ 𝑃
(1 𝑟 +𝑟𝑟)𝐼
1
+𝑟𝑡
( )
)))
maturity date.
  2  ₱
𝑃10,200
𝑃 1+𝑟𝑟)1) ( 10
((1+ 𝑃, 200
𝑃 1+
((1+ )( 0.02 1
𝑟𝑟) )=204
)𝑟𝑟  𝑃
𝑃₱
𝑃 ( 1+ 10,404
( 1+(𝑟1+
)+𝑟𝑃 ) ( (1+𝑟
1+𝑟 2
𝑟 ) ) 𝑟)
  3  ₱
𝑃 10,404
( 1+ 𝑟 ) 2( 10
𝑃, 4(01+ )2 𝑟
4 ) ( 0.02𝑟)=208.08 ₱
 𝑃
𝑃𝑃 (10,612.08
( 1+
1+ )2𝑟
(𝑟1+ 2
+ )𝑃 ( 1+𝑟
1 ))3
𝑟+𝑟
2
𝑟)
  4  ₱
𝑃10,612.08
( 1+ 𝑟 )3 ( 10
𝑃, 612.08
( 1+ ) ( 0.02 3
𝑟 ))=212.24
𝑟  ₱𝑃10,824.32
( 1+ 𝑟 ) 4
 𝑡   5  ₱
𝑃10,824.32
( 1+ 𝑟 )4 ( 10
𝑃, 824.32
( 1+ )( 0.02 4
𝑟 )) =216.49
𝑟  ₱𝑃11,040.81
( 1+ 𝑟 ) 5
TOTAL  ₱
𝑃11,040.81
( 1+ 𝑟 ) 5
𝐼  𝑆=𝑃𝑟𝑡
=𝑃𝑟𝑡
𝐼  𝐶 =𝐹 − 𝑃  𝐹
 

Accumulation Problem
the determination of the amount when we know the principal , the
interest rate , and the time for which is invested; to accumulate means to
find the compound amount resulting from the investment of
 Example. Find the maturity value and the compound interest if is compounded annually at an interest
rate of in ?
 
Given:  
Solution:

 𝐼𝐼𝐶𝐶
==𝐹−
𝐹𝑃=
− 11,040.81−
𝑃= 1,040.8110,000

 
Example. Suppose your father deposited in your bank account at an annual interest rate of
compounded yearly when you graduate from kindergarten and did not get the amount until you finish
Grade 12. How much will you have in your bank account after ?
 
Given:  
Solution:

 Is it advisable to deposit all your money on a savings account that earns at ?
Present Value of a Compound Interest
 
The principal can be thought of as a of the maturity value due in years invested at any rate . A formula
for can be obtained from the maturity value formula .

𝑡 𝑡𝑡
  𝐹𝐹 𝐹 𝑃
𝑃 𝑡 (𝑃
1+𝑟
( 1( 1+𝑟
+𝑟 ) ))
𝑃=
𝐹 = 𝑃𝑡 (= 1+𝑟
𝑡
𝑃
=𝑡
) 𝑡 𝑡𝑡
((1+𝑟
1 +𝑟
( 1+𝑟
) ) ) ( (1+𝑟 1( 1+𝑟
+𝑟 ) ))
 Example. What is the present value of due in if money is worth compounded ?

 
Given: Solution:
 Solution:

 
The example illustrates that in order for an investment to reach a maturity value of in at a rate of
per annum, an amount of must be initially invested.
 

Discount Problem
the determination of the present value of a known amount , when we
know the interest rate and the date on which is due; to discount means
to find its present value ; the discount on is
 Example. Find the unknown principal , rate , time , and compound interest by completing the table
below.
  Principal   Rate   Time   Interest   Maturity Value
 10,000  8 %  15  ( 2)  ( 1)
 3,000  5 %  6  ( 4 )  ( 3)
 50,000 10.5
  %  10  ( 6)  ( 5)
 ( 7)  2 %  5  ( 8)  50,000
 ( 9) 9.25
  %  2. 5  ( 10 ) 100,000
 
Solution:
  Solution:
  Solution:
 

Solution:
  Solution:
 
 Test your understanding.

 1. Find the unknown present value , rate , time , interest , and the maturity value by completing the
table.
  Present Value   Rate   Time   Interest   Maturity Value

 20,000  6 % 3   ( 2)  ( 1)
 ( 3)  5 %  5  ( 4)  50,000
 25,000 0.25
  %  4  ( 5)  ( 6)
 ( 7)  1 %   11  ( 8) 100,000
 

 2. How much money must be invested to obtain an amount in if money earns at compounded
annually?
3. A businessman invested in a fund that pays compounded annually for . How much was in the fund at
the end of the term?
References
• TEACHING GUIDE FOR SENIOR HIGH SCHOOL>General Mathematics>CORE SUBJECT
Commission on Higher Education, 2016
• THE MATHEMATICS OF INVESTMENT
William L. Hart, PhD. 1924
GIF and Video Credits
• https://www.intellectdesign.com/investor/annualreport/2019/index.html
Image Credits
• https://www.iconfinder.com/icons/445832/tool_old_gold_key_icon
 presentation created by
Laurence N. Magdalaga