LESSON 26:

COMPOUNDING MORE
THAN ONCE A YEAR.
Lesson Outline:
•Compounding more than once a year.
•Finding maturity value, interest, and present
value when compound interest is computed
more than once a year.
Definition of terms:
• Conversion or interest period – time between
successive conversions of interest.
•Frequency of conversion (m) – number of
conversion periods in one year.
•Nominal rate () – annual rate of interest.
•Rate () of interest for each conversion period

=
•Total number of conversion periods n

N= tm = (frequency of conversion) x (time in years)

*In the previous lesson, r was used to denote the
interest rate. Now that an interest can refer to two
rates (either nominal or rate per conversion period)
the symbol and j will be used instead.
Examples of nominal rate and the corresponding
frequencies of conversion and interest rate for
each period.
 = Nominal rate M= j = Interest Rate per One conversion
(Annual Interest Rate) Frequency of Conversion Period period
conversions

2% compounded annually;
= 0.02 1 = 0.02 = 2% 1 year
2% compounded semi-
annually;
= 0.02
2 = 0.01 = 1% 6 months
2% compounded
quarterly;
= 0.02
4 = 0.005 = 0.5% 3 months
2% compounded monthly:
= 0.02 12 = 0.0016= 0.16% 1 month
2% compounded daily;
= 0.02 365 1 day
•Let us recall from lesson 25 how to compute for
the compound amount when the principal P is
invested at an annual interest rate j
compounded annually,

We can modify this formula by noting that:

•The rate for each conversion period is j=
•In t years, interest is compounded mt times.
Thus, you obtain the following formula:
Maturity Value, Compounding m time a years

Where, F = maturity (future) value

P = principal
= nominal rate of interest (annual rate)
m = frequency of conversion
t = term/ time in years
*
has the same structure as

Where, j and refer to the interest rate per

conversion period,
t and mt refer to the number of times
that interest is compounded
EXAMPLE 1.
Find the maturity value and interest if 10,ooo
pesos is deposited in a bank at 2%
COMPOUNDED QUARTERLY for 5 years
EXAMPLE 2.
Find the maturity value and interest if 10,000
pesos is deposited in a bank 2%
COMPOUNDED MONTHLY for 5 years
EXAMPLE 3.
Cris borrows 50,000 pesos and
promises to pay the principal and
interest at 12% COMPOUNDED
MONTHLY. How much he repay
after 6 years?
Finding present value when interest is
compounded more than once a year
Present value P at Compound Interest

Where, F = maturity (future) value

P = principal
m = frequency of conversion
 = nominal rate of interest (annual rate)
t = term/ time in years
EXAMPLE 4.
Find the present value of 50,000
pesos due in 4 years if money is
invested at 12% COMPOUNDED
SEMI- ANNUALLY.
EXAMPLE 5.
What is the present value of
25,000 pesos due in 2 years and
6 months if money is worth 10%
COMPOUNDED QUARTERLY?
THANK YOU!!!