Presenter:

Ms. Mikee Sim

Interest that is computed on the sum of the
original principal of a deposit or loan and
the interest accumulated.

Interest earned per period is automatically

reinvested to earn more interest.

The rate of interest may be compounded

once, twice, or several times in a year.
Frequency of conversion (m) is the
number of times that the interest is
computed for the span of 1 year.
Total number of conversion periods for
the entire term (n) is the product of the
frequency of conversion and the number of
years.
Formula:
n=tm
Nominal rate (j) is the rate charged
which may be converted several times per
year.
Interest rate per period (i) nominal
rate divided by the frequency of conversion
per year.
Formula: j
i= -
m
Compound Interest (Ic) the total interest
earned for the entire term.
Compound Amount the sum of the original
principal and compound interest.
Formula:
F = P ( 1 + i )n
F = compound amount or accumulated value of
P at the end of the term
P = present value or original principal
i = interest rate per period
n = total number of conversion periods
the total interest earned for the entire term.

Formula:

Ic = F - P
If Mrs. Yalung invested P12,900 for 4 years
in a bank that pays 3% compounded semi-
annually, how much will she receive after 4
years? How much interest will Mrs. Yalungs
investment earn?

Given: P=P12,900; t=4 years; m=2; j=3%

Required: F and Ic
Solution:
j 0.03
i = - = - =0.015
m 2

n = tm = 4(2) = 8
 Solution:
F = P ( 1 + i )n
F = P12,900 ( 1 + 0.015 )8 = P14,531.75
Ic = F - P
Ic = P14,531.75 P12,900 = P1,631.75
Answer:
Mrs. Yalung will receive P14,531.75 after 4
years. Mrs. Yalungs investment will earn
total interest of P1,631.75 after 4 years.
What is the compound amount of P35,000
invested at 24% interest compounded
monthly for 15 months?

What is the compound interest earned at

the end of 1 year and 5 months if P34,200 is
invested at 12% compounded monthly?
F = P ( 1 + i )n

P = F ( 1 + i )-n
What is the present value of P35,000 due in
7 years and 6 months if the rate is 12%
compounded quarterly?

Given: F=P35,000; t=7.5 years; m=4;

j=12%

Required: P
Solution:
j 0.12
i = - = - = 0.03
m 4

n = tm = 7.5(4) = 30
 Solution:
P = F ( 1 + i )-n
P = P35,000 ( 1 + 0.03 )-30 =
P14,419.54
Answer:
The present value of P35,000 that is due at
the end of 7.5 years is P14,419.54.
A certain principal P was invested at 6%
compounded semi-annually. If this principal
amounted to P94,500 at the end of 3 years,
how much was the principal?

Given: F=P94,500; t=3 years; m=2; j=6%

Required: P
Solution:
j 0.06
i = - = - = 0.03
m 2

n = tm = 3(2) = 6
 Solution:
P = F ( 1 + i )-n
P = P94,500 ( 1 + 0.03 )-6 = P79,142.26
Answer:
The present value of P94,500 that is due at
the end of 3 years is P79,142.26.
What is the (a) present value and (b)
compound interest earned for 3 years and 9
months of P84,500 that is compounded
quarterly at 20% interest?

What is the present value of P64,300 if this

amount is invested at 7% compounded
monthly and is due after 2 years and 11
months?
 Interest rate per Compound Amount
period
j
i= - F=P(1+
m i )n
1 1

F n
i
F

n
1 j 1 m
P
P
A P65,000 investment earned an interest of
P3,500 in 2 years. At what nominal rate
compounded annually was the money
invested?

Given: P=P65,000; Ic=P3,500; t=2; m=1

Required: j = ?
Solution:

n = tm = 2(1) = 2

F = P + Ic
P65,000 + P3,500 = P68,500
 Solution:

1
1

F n
68500
1 m
2
j
j 1 1
P 65000

j = 0.0266 or 2.66%
Answer:
The amount P65,000 was invested at 2.66% annual
interest rate to earn a compound interest of P3,500 in 2
years.
If a certain principal is doubled in 16 years,
what is the interest rate compounded
quarterly at which it is invested?

What is the nominal rate compounded semi-

annually to be applied to the present value
P8,785 to give a compound amount of
P13,760 at the end of 4 years?
 Total number of Compound Amount
conversion periods

n=tm F=P(1+
i )n
F F
log log
P P
n t
log(1 i ) m log(1 i )
How long will it take P24,000 to amount to
P53,400 if it is invested at 12% interest
converted monthly?

Given: P=P24,000; F=P53,400; j=12%;

m=12

Required: t = ?
Solution:
j 0.12
i = - = - = 0.01
m 12
 Solution:

53400
log
24000
t 6.70 years
12 log(1 0.01)

Answer:
It will take 6.7 years to accumulate P24,000
to P53,400 at 12% compounded monthly.
How long will it take P55,000 to accumulate
to P185,000 if it is invested at 6% interest
compounded quarterly?

How long it will take for a certain amount of

money to triple itself if it is invested at 10%
compounded (a) annually; (b) semi-
annually; (c) quarterly; (d) monthly?
Interest rate Nominal rate Effective rate
Is the rate Is the rate Is the rate
charged by the charged which when
lender or rate which may compounded
of increase of annually is
be converted
the equivalent to a
investment
several times nominal rate j,
per year compounded
Computed
ONLY once for m times a year
the entire term

I=Prt 1
m
j
F

n
1 m j
P w 1 1
m
If present value or principal is invested for
one year at an effective rate, compound
amount F is:
FE = P ( 1 + w )
If the principal P, is invested at a nominal
rate j, compounded m times a year, the
compound amount F, obtained in t years is:

n
j
FN P 1
m
t = 1 year, n = m

m
j
FN P 1
m

Nominal rate = effective rate???

FE = FN
 m
j
P (1 w) P 1
m
m
j
(1 w) 1
m
m
j
w 1 1
m
FE FN
m
j
P (1 w) P 1
m
1
1
j
m
m
(1 w) m
1
m
1
j
(1 w) m
1
m
1
j
(1 w) m
1 1 1
m
1
j
(1 w) m
1
m
1

j m (1 w) m
1

Find the effective rate equivalent to a
nominal rate of 5% compounded quarterly.
Apply the effective and nominal rates
determined to find the compound amount of
P5,000 for 1 year.

Given: j=0.05; m=4; P=P5,000; t=1 year

Required: w = ?; FE = ?; FN = ?
 Answer:
The effective rate equivalent to 5%
compounded quarterly is 5.0945336914062%.
w = 0.050945336914062 or 5.0945336914062%

P5,000 will amount to the compound amount of

P5,254.7267 after 1 year if invested at 5%
compounded quarterly or 5.0945336914062%
effective
FE = P5,254.7267
FN = P5,254.7267
What is the effective rate equivalent to a
nominal rate of 5% compounded semi-
annually?

What is the nominal rate that will yield an

effective rate of 8% if interest is
compounded (a) annually, (b) semi-
annually, (c) quarterly, and (d) monthly?
 F1 = F2

m2

j2 m1

j1 m1 1 1
m2


m1

j1 m2
j2 m2 1 1
m1

What nominal rate compounded semi-
annually is equivalent to 20% compounded
quarterly?

Given: m1=2; j2=0.20; m2=4

Required: j1 = ?
Answer:
m2

j2 m1
j1 m1 1 1
m2

4

0.20 2
j1 2 1 1
4

A nominal rate of 20.5% compounded semi-annually
is equivalent to 20% compounded quarterly.
 Mrs. Yong intends to invest money in a bank.
Bank A offers 5% interest compounded semi-
annually, while Bank B offers 4.5% interest
compounded monthly. If she wants to invest
using the higher effective interest, in which
bank should she invest her money?

Given: Bank A: jA=0.05; mA=2;

Bank B: jB=0.045; mB=12
Required: The bank where Mrs. Yong must invest
her money
 Answer:

mA mB
jA jB
BANK A : wA 1 1 BANK B : wB 1 1
mA mB
2 12
0.05 0.045
wA 1 1 0.0506 wB 1 1 0.0459
2 12

Since Bank Bs effective rate is less than Bank As effective

rate, Mrs. Yong should invest her money in Bank A.
What is the nominal rate that, if
compounded monthly, is equivalent to (a) 8
% compounded semi-annually; (b) 8 %
compounded quarterly; and (c) 8 %
effective rate?