MODULE 9: COMPOUND INTEREST 1

Local Flavor. Global Future

 COMPOUND INTEREST

COMPOUND INTEREST
Compound interest means that the interest is computed more than once during the time of the loan. Here, interest
loans are generally for time periods of a year or longer.

Formula to compute for the compound amount: F = P(1 + i)n

where F is the compound amount
P is the principal or present value
i is the interest rate per period
n is the total number of periods
Formula to compute for the compound interest: I = F – P
where I is the compound interest
Formula to compute for i: i = r/m
where r is the given interest rate
m is the conversion period
Formula to compute for n: n = t x m
where t is the given term or time

Local Flavor. Global Future

COMPOUND INTEREST
Conversion periods
Compounded annually m=1
Compounded semi-annually m=2
Compounded quarterly m=4
Compounded monthly m = 12

Example: 1.) Miss Santos invested P 500,000 in an account at 10% compounded semi-annually for 2 years. Compute
for the compound interest.

Given: P = P 500,000 r = 10% t = 2 years m=2

i = r/m = 10%/2 = 5% (.05) n = txm = 2 years x 2 = 4
Solution:
F = Px(1 + i)n
F = P 500,000 x (1 + .05)4
F = P 607,753.13

I=F–P
I = P 607,753.13 – P 500,000
I = P 107,753.13

Local Flavor. Global Future

 COMPOUND INTEREST
Example: 2.) If money is worth 12% compounded quarterly, how much will be P 120,000 after 3 years?

Given: P = P 120,000 r = 12% t = 3 years m=4

i = r/m = 12%/4 = 3% (.03) n = txm = 3 years x 4 = 12

Solution: F = P 120000x(1+.03)^12
F = P 171,091.31

Example: 3.) Find the compound amount if P 235,000 is invested at 5% compounded monthly for 2 years.
Given: P = P 235,000 r = 5% t = 2 years m = 12
i = r/m = 5%/12 = .41666666667% n = t x m = 2 years x 12 = 24

Solution: F = 235,000x(1+.05/12)^24
F = P 259,661.21

Local Flavor. Global Future

COMPOUND INTEREST
SAMPLE PROBLEMS TO SOLVE

1.) A man invested P 250,000 in an account at 8.5% compounded semi-annually for 4 years.
Compute for the compound interest.

2.) Compute for the compound amount of P 300,000 invested at 9.88% compounded quarterly
for 5 years.

Local Flavor. Global Future

 COMPOUND INTEREST
Present Value and Compound Discount
When amount or future value is known, the present value is the amount that must be invested today in
order to accumulate interest to that future value.
For example, a company needs P 500,000 after 5 years, how much should be invested today at 8% compounded
quarterly.
Using the main formula F = P(1+i)n , we will derive the formula for P

F = P(1+i)n
(1+i)n (1+i)n

P= F or P = F (1+i)-n
(1+i)n
To solve the problem:
Given: F = P 500,000 r = 8% t = 5 years m=4
i = 8%/4 = 2% (.02) n = t x m = 5 years x 4 = 20
Solution: P = F (1+i)-n
= P 500,000 x (1 + .02)-20
P = P 336,485.67

Local Flavor. Global Future

 COMPOUND INTEREST
If compound discount is asked, it is computed using the formula I = F – P where I is the compound discount.

Example: Compute for the Present value and Compound discount of F = P 350,000 at 9% compounded semi-
annually for 8 years.

Given: F = P 350,000 r = 9% t = 8 years m=2

i = r/m = 9%/2 = 4.5% (.045) n = 8 years x 2 = 16

Solution: P = F (1+i)-n
P = P 350,000 x (1 + .045)^-16
P = P 173,064.26

I=F–P
I = P 350,000 – P 173,064.26
I = P 176,935.74

Local Flavor. Global Future

COMPOUND INTEREST
SAMPLE PROBLEMS TO SOLVE

1.) Compute for the Present value and Compound discount of F = P 150,000 at 7.26% compounded
monthly for 4.5 years.

2.) What is the present value of an amount of P 195,000 invested at 7.55% compounded annually
for 6 years?

Local Flavor. Global Future

 COMPOUND INTEREST
Accumulation Problem

To accumulate means to compute only for the Compound Amount (F)

Example: Accumulate P 98,500 for 3 years at 6.6% compounded

a.) annually b.) semi-annually c.) quarterly d.) monthly

To solve, write all the given

Given: P = P 98,500 r = 6.6% t = 3 years
a.) m = 1 b.) m = 2 c.) m = 4 d.) m = 12
i = 6.6% (.066) i = 3.3% (.033) i = 1.65% (.0165) i = .55% (.0055)
n=3 n=6 n = 12 n = 36

Solution:
a.) F=P 98,500x(1+.066)3 b.) F=P 98,500x(1+.033)6 c.) F=P 98,500x(1+.0165)12 d.) F=P98,500x(1+.0055)36

Local Flavor. Global Future

COMPOUND INTEREST
SAMPLE PROBLEMS TO SOLVE

1.) Accumulate P 185,000 for 5 years at 8.75% compounded semi-annually.

2.) Accumulate P 295,000 at 9.66% compounded monthly for 2.75 years.

Local Flavor. Global Future

 COMPOUND INTEREST
Discounting Problem

To discount means to compute only for the Present Value (P)

Example: Discount P 85,000 for 5 years compounded quarterly at

a.) 4% b.) 6% c.) 8% d.) 10%

To solve, write all the given

Given: F = P 85,000 t = 5 years m=4 n = txm = 5 years x 4 = 20
a.) r = 4% b.) r = 6% c.) r = 8% d.) r = 10%
i = 1% (.01) i = 1.5% (.015) i = 2% (.02) i = 2.5% (.025)

Solution:
a.) P=P 85,000x(1+.01)-20 b.) P=P 85,000x(1+.015) -20 c.) P=P 85,000x(1+.02) -20 d.) P=P 85,000x(1+.025) -20

Local Flavor. Global Future

COMPOUND INTEREST
SAMPLE PROBLEMS TO SOLVE

1.) Discount P 285,000 for 4 years at 6.75% compounded quarterly.

2.) Discount P 325,000 at 8.56% compounded semi-annually for 4.5 years.

Local Flavor. Global Future

Any Questions

Local Flavor. Global Future