SENIOR HIGH SCHOOL

Compounding More than Once a Year

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

1 Compute maturity value, interest and present value, and solve problems involving
compound interest when compound interest is compounded more than once a year.

TIME FRAME: 90 minutes

Definition of Terms
 Principal – money invested as capital.
 Time or Term – time in years.
 
Compound Amount – the future value or maturity value at the end of the transaction in compounding
interest.
Conversion Period or Interest Period – time between successive conversions of interest into principal.
 Frequency of Conversion – number of conversion periods in one year.
 Annually – yearly conversion period, .
 Semi-annually – twice a year or every 6 months conversion period, .
 Quarterly – every 3 months conversion period, .
 Monthly – every month conversion period, .
 Daily – everyday conversion period, .
 Nominal Rate – annual rate of interest.
 Rate of Interest per Conversion Period – .

 Total number of Conversion Periods – .

Compounding More than Once a Year
Compounding can be done more than once a year in order for an investment to earn more interest.
Consider the illustration below.
 
Example. Find the compound amount of an investment of at annual interest but compounded
quarterly in ? Compare the compound amount to the same investment but compounded only once at .
  nominal rate
 𝑃  𝑡
Conversion Period   Principal Compound Interest   Compound Amount
after conversions
  1
 month  ₱ 10,000 (  10,000 ) ( 0.02 )=200  ₱ 10,200

times
  2
 month  ₱ 10,200 ( 10 , 200 )( 0.02 ) =204  ₱ 10,404
 
  3
 month  ₱ 10,404 ( 10 , 4 0 4 ) ( 0.02 )=208.08  ₱ 10,612.08
 𝑚   4
 month  ₱ 10,612.08 ( 10 , 612.08 ) ( 0.02 )=212.24 ₱
  10,824.32
TOTAL
  interest rate per  ₱ 10,824.32
conversion period
 Comparing the above result to compounded once at an interest rate of .
𝑡 1
 𝐹=𝑃 ( 1+𝑟 ) =( 10,000 ) ( 1+ 0.08 ) =10,800  𝐹
This suggests that frequent compounding results into higher interest.
 Compounding times a Year
 
Example. Find the compound amount of an investment of at annual interest but compounded
quarterly in ? Compare the compound amount to the same investment but compounded only once at .

  Compound Amount
Conversion Period   Principal Compound Interest after conversions
1
  𝑖 8   8  𝑖 1𝑖 81 8     8 0.08𝑖 8 𝑖 𝑖 1 1 88   𝑖 𝑖1𝑖 811 88
1 (
𝑚 4
1
) ( ) ( ) ( )( ( ) () )
4
₱ 10,000
𝑃
𝑚 𝑚4 4 ( )( ( ) )( (() ) )(( )) ( ( )( ())()( )
4
𝑃 )=200
( 10,000 ) ( 0.02
4 𝑚
=200
4 𝑚𝑚 44
₱
𝑃
𝑃+10,200
1+𝑃
𝑚𝑚𝑚4 44
  𝑖 8     𝑖 1 𝑖 81 8     0.0
𝑖 8𝑖 2 11
8 𝑖 𝑖 88   𝑖𝑖𝑖 𝑖 2 1 88𝑖 2𝑖 8 𝑖
8 2
2 (
𝑚 4
1
) ( ) ( )( ( ) () )
𝑃₱1+10,200
𝑚 𝑚4 4 ( ( )( ) ) ( ( () ))(( )) ( ())() )( ( ) ) ()( ) ) ( 4 )
( 10 ,𝑃2001+
))( 0.02 ) =204
=204
𝑚4 𝑚 4 𝑚𝑚 44
₱
𝑃
𝑃10,404
1+
1+
1+ + 1+
𝑚
𝑃 1+
𝑚𝑚𝑚 44𝑚 𝑚 4 𝑚
  𝑖 8     𝑖 2 𝑖 81 8     𝑖 2 𝑖 8
0.08 𝑖 𝑖 1 1 88   𝑖 3𝑖 188
3 (
𝑚 4
1
) ( ) ( )( ( ) () )
𝑃₱1+10,404
𝑚 𝑚4 4 ( ( ) () )( ) (( ) )(( )) ( () () ( ))
( 10 ,𝑃4 01+
4 ) ( 0.02 )=208.08
=208.08
𝑚4 𝑚 4 𝑚𝑚 44
₱𝑃10,612.08
1+
𝑚 𝑚 44
  𝑖 8     𝑖 3 𝑖81 8    
3
𝑖 0.08𝑖 8 11
𝑖 𝑖 88  𝑖 4𝑖 188
4 (
𝑚 4 ) ( ) ( ) ( ) )( )
𝑃₱ 1+
10,612.08
𝑚 𝑚4 4 ( () ( ))( ) (( ))( ( ))( () () ( )
( 10 ,𝑃612.08
1+ ) ( 0.02 )=212.24
𝑚 4𝑚 4
=212.24
𝑚𝑚 44
₱𝑃10,824.32
1+
𝑚 𝑚 44
  𝑖 1 8   𝑖 1𝑚𝑚𝑡𝑡8 8
TOTAL
𝑚 4( )( ) ( ( ) ( () )
₱𝐹=𝑃
10,824.32
1+
𝑚𝑚 44
 If a transaction last for years then the total number of conversions compounded times per year is .
 Example. Find the maturity value and interest if is deposited in a bank at compounded quarterly for ?

 
Given:  
Solution:

 𝐼𝐼𝐶𝐶
==𝐹−
𝐹𝑃=
− 11,048.96
𝑃= 1,048.96
−10,000

 Example. Find the maturity value and interest if is deposited in a bank at compounded monthly for ?

 
Given: Solution:
 Solution:

 𝐼𝐼𝐶𝐶
==𝐹−
𝐹𝑃=
− 11,050.79
𝑃= 1,050.79
−10,000
Present Value of a Compound Interest
 
The present value or principal for a given maturity of future value is given by:

 Example. Find the present value of due in if money is invested at compounded semi-annually?

 
Given: Solution:
 Solution:

 
The example illustrates that in order for an investment to reach a maturity value of in at a rate of
compounded semi-annually, an amount of must be initially invested.
Interest for Fractional Parts of a Period
 
Note that from the formula for the compound amount for an investment compounded times per year in
years, its natural to assume that the total number of conversion periods is an integer. However, the
formula can also be used even if the exponent is a fraction or decimal. Consider the illustration below.

 Example. Accumulate for and , at the rate of compounded quarterly?

Given:
 G iven: Solution:
 Solution:

or
and
Example. Complete the entries in the table below.

 Principal  Nominal Rate Compounded   Time  𝑚  𝑛  Maturity Value  Interest

 10,000  8 % semi-annually   years  (2

1)  30
(2)   ( 3 )  ( 4 )
 3,000  5 %   quarterly   years and months  4  25
(5)   ( 6 )  ( 7)
 ( 8) 10.5
  % monthly   years and months  (12
9) 127
( 10
  ) 1,000,000
   ( 11 )
 

Solution:
  Solution:
  Solution:
  years
years
Continuous Compounding
 
Interest can be compounded continuously like every hour, every minute, or even a fraction of a second. If
the number  of compounding
1 𝑥 is to increase without bound, this procedure approaches what is called
  𝑥 𝑓 𝑥 compounding.
continuous ( ) ( )
= 1+
𝑥
1 2
The formula
10 for continuous compounding is derived as follows:
2.59374246
20 2.653297705
  𝑥𝑖𝑡𝑥𝑚 𝑡𝑖𝑡 𝑥 𝑥𝑖𝑡𝑥𝑖𝑡 𝑖𝑡
𝑖𝑡 11
𝑖 111
([( [( )) ][([() )])] ]
30 2.674318776
 
Recall
Note
Let thatthat
as the interest rate per
40 2.685063838
𝐹=𝑃
𝐹=
𝐹 =𝑃𝑃 1+
𝑒
1+
1+ 1+
 𝑒=2.718281828 conversion period is given by
50
100
2.691588029
2.704813829 𝑥𝑚
𝑥 𝑥 𝑥𝑥
1000 2.716923932  𝑚1𝑚 𝑚 𝑖1 11
2000 2.717602569 𝑥=
𝑥=
𝑥=𝑗= =→∞
 Example.
3000 Suppose
2.71782892 you invested at compounded continuously. 𝑖𝑗 𝑖will𝑚𝑖𝑗you
How much 𝑗𝑗 have from this
investment
4000
5000
after ?
2.717942121
2.71801005
6000 2.71805534
 
Given:
7000 2.718087691  
Solution:  1 𝑖 1   1
8000 2.718111955 = 𝑚= 𝑥𝑖
9000 2.718130828 𝑥 𝑚 𝑗 𝑗
 Test your understanding.

1. Complete the entries in the table below.

 Principal  Nominal Rate Compounded   Time  𝑚  𝑛  Maturity Value  Interest

 5,000  6 % semi-annually   years  ( 1 )  ( 2 )   ( 3 )  ( 4 )

 30,000  2 % quarterly   years and months  ( 5 )  ( 6 )   ( 7 )  ( 8)
 ( 9)  10 % monthly   years ( 10 ) (  11 )  100,000  ( 12 )

 2. Accumulate for at compounded monthly?

3. You are planning to invest . Bank A is offering compounded semi-annually while Bank B is offering
compounded monthly. If you plan to invest this amount for , in which bank should you invest?
4. Find the maturity value after if is invested at the rate of compounded continuously. Compare your
answer with the compound amount in case the rate is compounded quarterly.
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
• GeoGebra
 presentation created by
Laurence N. Magdalaga