COMPOUNDING

MORE THAN ONCE A

YEAR
LEARNING OUTCOME:
At the end of the lesson, the learner is
able to compute maturity value, interest,
and present value, and solve problems
involving compound interest when
compound interest is computed more than
once a year.
 ACTIVITY 1 :

Compute how much money you will have after 5

days if you deposited 100 in a bank.
GROUP 1 – This group will earn compound
interest each day at a rate of 5%
GROUP 2 – This group will earn compound
interest twice a day at a rate of 2.5%
Example 1: Given a principal of P10,000, which
of the following options will yield greater
interest after 5 years?
Option A: Earn an annual interest rate of 2% at
the end of the year, or
Option B: Earn an annual interest rate of 2% in
two portions – 1% after 6 months, and 1% after
another 6 months?
Option A:Interest is compounded annually
Principal = P10,000
Time (t) in Annual Interest Rate = 2%, compounded annually
years
Amount at the end of the year
1 (10,000)(1.02) = 10,200
2 (10,200)(1.02) = 10,404
3 (10,404)(1.02) = 10,612.08
4 (10,612.08)(1.02) = 10,824.32
5 (10,824.32)(1.02) = 11,040.81
Option B:Interest is compounded semi-annually, or every 6 months
Time (t) in Principal = P10,000
Annual Interest Rate = 2%, compounded semi-annually
years Amount at the end of the year
½ (10,000)(1.01) = 10,100
1 (10,100)(1.01) = 10,201
1½ (10,201)(1.01)= 10,303.01
2 (10,303.01)(1.01) = 10,406.04
2½ (10,406.04)(1.01) = 10,510.10
3 (10,510.10)(1.01) = 10,615.20
3½ (10,615.20)(1.01) = 10,721.35
4 (10,721.35)(1.01) = 10,828.56
4½ (10,828.56)(1.01) = 10,936.85
5 (10,936.85)(1.01) = 11,046.22
Option B introduces new concepts. Because
interest is compounded twice a year, the
conversion period = 6 months
Frequency of conversion = 2
Total number of conversion = 10 (5 years * 2)
Nominal rate = 2%
Rate of interest for each conversion period = 1%
DEFINITION OF TERMS:

*CONVERSION OR INTEREST PERIOD

- time between successive conversions of
interest

*FREQUENCY OF CONVERSION (m)

- number of conversion periods in one year
DEFINITION OF TERMS:

*NOMINAL RATE
- annual rate of interest

*RATE (j) OF INTEREST FOR EACH CONVERSION

PERIOD
=
= Nominal Rate (Annual m = Frequency of j = Interest Rate per One conversion period
Interest Rate) Conversions conversion Period

2% compounded 1 1 year
annually,

2% compounded 2 6 months
semi- annually,

2% compounded 4 3 months
quarterly,

2% compounded 12 1 month
monthly,

2% compounded 365 1 day

daily,
MATURITY VALUE, COMPOUNDING m TIMES A YEAR

Where
F = maturity (future value)
P = Principal
nominal rate of interest (annual rate)
m = frequency of conversion
t = term / time in years
Example 2
Find the maturity value and interest if P10,000 is
deposited in a bank at 2% compounded quarterly
for 5 years.

Example 3
Find the maturity value and interest if P10,000 is
deposited in a bank at 2% compounded monthly
for 5 years.
 PRESENT VALUE P AT COMPOUND INTEREST

Where
F = maturity (future) value
P = principal
nominal rate of interest (annual rate)
m = frequency of conversion
t = term / time in years
Example 4
Find the present value of P50,000 due in 4 years if
money is invested at 12% compounded semi-
annually. Ans. P31,370.62

Example 5
What is the present value of P25,000 due in 2
years and 6 months if money is worth 10%
compounded quarterly? Ans. P19,529.96
ACTIVITY 2
Complete the table by computing the interest rate per period and
total number of conversion periods.
Nominal Rate Interest Frequency of Interest Rate
Compounded conversion (m) per conversion
period
12% Semi-annually
2 6%
16% Quarterly
4 4%
9% Monthly
12 0.75%
Daily 0.03%
10.95% 365
PLATE#3
SOLVE THE FOLLOWING PROBLEMS ON
COMPOUND INTERESTS.
1. Find the compound amount due in 8 years if
P200,000 is invested at 12% compounded
monthly.
2. What present value, compounded quarterly
at 6%, will amount to P59,780.91 in 3 years?
SEATWORK:
1. How much should Kaye set aside and invest in
a fund earning 2% compounded quarterly if
she needs P75,000 in 15 months? P73,152.80
2. Peter is planning to invest P100,000. Bank A is
offering 5% compounded semi-annually while
Bank B is offering 4.5% compounded monthly.
If he plans to invest this amount for 5 years, in
BAnk A gives higher
which bank should he invest? compound amount
BAnk A: F=P128,008.45; Bank B: F = P125,179.85
FILL-IN THE BLANKS.
1. When the money is compounded monthly, the frequency
12
of conversion is _____.
2. When the annual interest rate is 16% compounded
0.04
quarterly the interest rate in a conversion period is ____.
3. If the interest rate per conversion period is 1% and money
0.12
is compounded monthly, the nominal rate is ____.
4. When the term is 3 years and 6 months and money is
compounded semi-annually, the total number of
7
conversion period is ____.
5. When the total number of conversion periods is 12 and
term is 6 years, then money is compounded ____.Semi-annually