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RECAP QUESTION
 Module 11.2:

Compound Interest
C O N T I N U O U S LY
R AT E S : E F F E C T I V E , N O M I N A L ,
E Q U I VA L E N T
 Learning Objectives
At the end of this module you will be
able to
 define compound interest mathematically;
 solve for the maturity value and present value of
compounded interest annually and more than once a year;
and
• solve for continuous compound interest, interest rate, time,
maturity value of continuous compounding interest, effective
and nominal rate.
CONTINUOUS COMPOUND INTEREST
Interest can be compounded continuously like every hour, every
minute or even a fraction of a second. If the number of
compounding m is to increase without bound, this procedure
approaches what is called continuous compounding.

Continuous Compound Interest

compounded continuously, then the amount F at the end of t years is
given by
 01

02

01 03

Finding the 04

Maturity Value of 05
Continuous
Compound Interest
06
 Finding the Maturity Value of
Continuous Compound Interest
Example 1:

Suppose you invested P24,000 at 9% compounded

continuously. How much will you have after 8.5
years?

P = 24 000 = 0.09 t = 8.5

 01

02

02 03

Time in 04

Compound 05

Interest 06
 Finding the Time in
Compound Interest
Example 2:
In how many years will it take P13,000 accumulate to P18,000
when deposited in a savings account that earns 3% compounded
quarterly?

P = 13 000 F = 18 000 = 0.03 m = 4

 01

02

03 03

Rates: Nominal, 04

Effective, 05

Equivalent 06
 Definition of terms
Nominal Rate (i) – annual interest rate (may be
compounded more than once a year.
Effective Rate (r) – the rate compounded annually that
will give the same compound amount as a given
nominal rate; denoted by
Equivalent Rates – two annual rates with different
conversion periods that will earn the same
compound amount at the end of a given number of
years.
 Effective and Nominal Rates
P800 is invested for one year. If the interest rate is
a) 9.04% compounded annually
b) 8.75% compounded quarterly
Determine the amount after one year.

9.04% compounded annually is an effective rate

8.75% compounded quarterly is a nominal rate. Equivalen
t
 01

02

04 03

04

Finding Nominal 05

Rate 06
 Finding Nominal Rate
Example 3:
Blaster borrowed an amount of P20,000 which he
paid with an interest of P4,000 at the end of 3 years.
At what nominal rate compounded semi-annually was
it invested?

P = 20, 000 F = 24, 000 t = 3 m=2 j=?

 01

02

05 03

04

Finding Effective 05

Rate 06
 Effective Rate Formula
The formula to calculate the effective rate of interest is
given by

( )
𝑚
𝑖
𝑟 = 1+ −1
𝑚
where : = Effective rate of interest
m = frequency of conversions
= nominal interest rate (per year)
 Finding Effective Rate
Example 4:
What effective rate is equivalent to 15% compounded
monthly?

= 0.15 m = 12
 GOT SOME
QUESTIONS?