Compound Interest

Simple interest is calculated on the

principal, or original, amount of a loan.
Compound interest is calculated on the
principal amount and also on the
accumulated interest of previous periods,
and can thus be regarded as “interest on
interest.
P= 100,000.00
r= 10%
Simple Interest Compound Interest
Year1 110,000.00 110,000.00
Year2 120,000.00 121,000.00
Year3 130,000.00 133,100.00
Year4 140,000.00 146,410.00
Year5 150,000.00 161,051.00
Year6 160,000.00 177,156.10
Year7 170,000.00 194,871.71
Year8 180,000.00 214,358.88
Year9 190,000.00 235,794.77
Year10 200,000.00 259,374.25
P= 100,000
r= 10% Compound Interest
Simple Interest Annually Semi-annually Quarterly Monthly
Year1 110,000.00 110,000.00 110,250.00 110,381.29 110,471.31
Year2 120,000.00 121,000.00 121,550.63 121,840.29 122,039.10
Year3 130,000.00 133,100.00 134,009.56 134,488.88 134,818.18
Year4 140,000.00 146,410.00 147,745.54 148,450.56 148,935.41
Year5 150,000.00 161,051.00 162,889.46 163,861.64 164,530.89
Year6 160,000.00 177,156.10 179,585.63 180,872.59 181,759.43
Year7 170,000.00 194,871.71 197,993.16 199,649.50 200,792.02
Year8 180,000.00 214,358.88 218,287.46 220,375.69 221,817.56
Year9 190,000.00 235,794.77 240,661.92 243,253.53 245,044.76
Year10 200,000.00 259,374.25 265,329.77 268,506.38 270,704.15
 Simple and Compound Interest
450,000.00
400,000.00
350,000.00
300,000.00
250,000.00
200,000.00
150,000.00
100,000.00
50,000.00
-
0 2 4 6 8 10 12 14 16
Simpe Interest Anually
Compound Amount Formula

 F=final amount
 P=principal or original amount
 i=interest rate per period
 Where , j=nominal rate and m=number of interest compounding
period in 1 year
 n=number of interest compounding period
 Where , t= number of years
Conversion of Nominal rate to interest
compounding period
Nominal
rate(j) Compounded m i
12% annually 1 12%
12% semi-annually 2 6%
12% quarterly 4 3%
12% monthly 12 1%
Example
Find the compound Interest due at the end
of 5 years if P 10,000 is invested 6%
compounded annually, semi-annually,
quarterly and monthly.
 Compound Amount Table Factors

Finding Compound Amount (Future Value)

Compound amount = Principal * Table Factor
Present Value

F=future value
P=Present Value
i=periodic rate
n=number of periods
In order to accumulate P 1,000,000 ten
years from now, how much should be
invested today at 10% compounded semi-
annually?
 Table Factors for Present Value

Finding Present Value

Present value P = Future value * Table Factor
Finding Future Value and Present
Value if n is not whole
Future Value if n is not a whole number

Find the compound amount at

the end of 3 years and 5 month
if P 20,000 is invested at 8%
compounded semi-annually.
Present Value if n is not a whole number

Find the amount to be invested

today in order to accumulate P
300,000 after 5 years and 4
months if the money will grow
at 10% compounded quarterly.
Nominal Rate and Effective rates.

The effective rate of interest is the equivalent

annual rate of interest which is compounded
annually
Find the effective rate of an
investment of P 100,000 if the
money is yields 8%
compounded quarterly for one
year.
 A lending institution is
offering loans at 17 ½%
effective rate, at what
nominal rate compounded
quarterly could a borrower
just as well borrow that
will pay the same amount
of interest?