COMPOUND

INTEREST
 What is the different between creditor and
debtor?
LENDER or CREDITOR
>person(or institution) who invests the money or makes the money
or makes the funds available.

BORROWER or DEBTOR
>person (or institution) who owes the money or avails of the funds
from the lender
INTEREST (I)
-income derived from invested capital
money paid as rental for the use of money
a fixed rated proportion as the rate of interest for any specified time
unit.

INTEREST RATE (r)

-ratio of the interest earned in one time unit to the principal.

PRINCIPAL or PRESENT VALUE (P)

-refers to the capital originally invested in a business
transaction.
MATURITY (FUTURE) VALUE AT THE END OF THE
TERM (F)
• the sum of the principal (P) and the interest (I) due at any
time after the investment of the principal.

TIME (t)
• period of coverage of the transaction. unless otherwise
specified, the time unit will be one year.
ANNUAL INTEREST
-refers to the amount of interest earned
or paid within a one-year period.

SEMI-ANNUAL INTEREST
-refers to the interest that is calculated
and either earned or paid twice a year or
every 6 months.
COMPOUNDING
-refers to the process of continously adding interest to a
principal amount, leading to exponential growth.

COMPOUNDED ANNUALLY
-a method of calculating and adding interest to an investment
or loan once a year, rather than for another period
ex. if you borrow 100,000 pesos at 5% interest compounded
annually, after the first year you would owe 5,250 pesos on a
principal of 105,000.
 2 TYPES OF INTEREST
1) SIMPLE INTEREST

2) COMPOUND INTEREST (Ic)

• if during the term of investment, the interest due at stated
intervals is added to the principal and thereafter earns interest,
the sume of the increses over the principal by the end of the
term of investment is called compound interest
FORMULA> Ic=F-P
where: F= maturity or future value and
P=principal or present value
EXAMPLE:1
find the compound interest if F is 22,000 and P is
13,000

Ic=F-P
Ic=22,000-13,000 ---substitution
Ic=9,000
EXAMPLE: 2
Find the compound interest if P 10,000 is
compounded annually at an interest rate of 2% in
5 years.
FORMULA
MATURITY (FUTURE) VALUE > F= P(1+r)t
where:
P= principal or present value
F= maturity (future) value at the end of the term
r= interest rate
t= term/ time in years
EXAMPLE: 2
Find the compound interest if P 10,000 is compounded
annually at an interest rate of 2% in 5 years.
Given: P=10,000 r=2% or 0.02 t=5
Solution:
a) maturity value b) compound interest
F=P(1+r)t Ic=F-P
F=10,000(1+0.02)5 Ic=11,040.81-10,000
F=10,000(1.02)5 Ic=1,040.81
F=10,000(1.104)
F=11,040.81
EXAMPLE:3
Find the maturity value and interest if P 50,000 is invested at 5%
compounded annaully for 8 years.
Given: P=50,000 r=5% or 0.05 t=8

solution:
a)Maturity value b)Compound interest
F=P(1+r)t Ic=F-P
F=50,000(1+0.05)8 Ic=73,872.77-50,000
F=50,000(1.05)8 Ic=23,872.77
F=50,000(1.477)
F=73,872.77
EXAMPLE:4
Pablo borrowed Php. 1000 with an interest rate of 10%
compound monthly which he borrowed from the cooperative.
Compute how much he will pay in 1 year?
GIVEN: P=1000 r=10% or 0.1 t=1 year
solution:
a) maturity value b) compound interest
F=P(1+r)t Ic=F-P
F=1,000(1+0.1)12 Ic=3138.43-1000
F=1,000(1.1)12 Ic=2,138.43
F=1,000(3.14)
F=3138.43
EXAMPLE 5:
Marianne deposit Php 20,000 with an interest rate of 6%
compounded yearly. What is the amount of money after 10
years.

GIVEN: SOLUTION: F=P(1+r)t

P=20,000 F=20,000(1+0.06)10
r=6% or 0.06 F=20,000(1.06)10
t=10 years F=20,000(1.79)
F=35,816.95
EXAMPLE 6: Mr. Ocampo invested P150,000 at 10% compounded
annually. He plans to get this amount after 6 years for his son’s college
education. How much will he get?

GIVEN: SOLUTION: F=P(1+r)t

P=150,000 F=150,000(1+0.1)6
r=10% or 0.1 F=150,000(1.1)6
t=6 years F=150,000(1.77)
FIND: F F=265,734.15

ANSWER: After 6 years He will get P265,734.15.

PRESENT VALUE P at COMPOUND
INTEREST
FORMULA:
P = = F(1+r)-t
where
P=principal or present value
F=maturity(future) value at the of the term
r=interest rate
t=term/time in years
EXAMPLE 1: What is the present value of P50,000 due in 7
years if money is worth 10% compound annually?
GIVEN: F=50,000 r=10% or 0.1 t=7 years
FIND: P

SOLUTION: The present value Pkkcan be obtained by

P=
P=50,000/(1+0.1)7
P=50,000/(1.1)7
P=50,000/1.9487
P=25,657.9
EXAMPLE 2: What is the present value of P50,000 due in 7
years if money is worth 10% compound annually?
GIVEN: F=50,000 r=10% or 0.1 t=7 years
FIND: P
P=F(1+r)-t
P=50,000(1+0.1)-7
P=50,000(1.1)-7
P=50,000(0.513)
P=25657.9
EXAMPLE 3:How much money should place in a time deposit
in a bank that pays 1.1% compounded annually so that he will
have P200,000 after 6 years?
GIVEN: F=200,000 r=1.1 or 0.011 t=6 years
FIND: P
SOLUTION: The present value P can be obtained by
P=F(1+r)-t
P=200,000(1+0.011)-6
P=200,000(1.011)-6
P=200,000(0.936468)
P=187,293.65
EXAMPLE 4: Mr. Buatista aims to have his investment grow to
P500,000 in 4 years. How much should he invest in an account
that pays 5% compounded annually?

GIVEN: SOLUTION: P=
F= 500,000 P = 500,000/(1+0.05)4
r=5% or 0.05 P = 500,000/(1.05)4
t=4 years P= 500,000/(1.21)
P= 411,351.24
EXAMPLE 5: Mrs. Chavez has deposited her money in a bank
and is 2.3% compounded annually. After 8 years she got
23,990 pesos, how much money did she invest?
GIVEN: SOLUTION: P=F(1+r)-t
F=23,990 P=23,990(1+0.023)-8
r=2.3% or 0.023 P=23,990(1.023)-8
t=8 years P=23,990(0.83)
FIND=P P=19,999.778