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Compound Interest
Simple Interest
Suppose you won P10,000 and you
plan to invest it for 5 years. A
cooperative group offers 2% simple
interest rate per year. A bank offers
2% compounded annually. Which
will you choose and why?
Solution:
Simple interest, with annual rate r
Time(t) Principal Simple Interest Amount after t years
(P) (Maturity Value
Solution Answer
I = Prt
𝐼
r=
𝑃𝑡
𝐼
t=
𝑃𝑟
Example 1:
Issa deposited Php 10,000 in a bank that offers a
simple interest rate of 2.5%. If she placed the money
for 3 years, how much interest will she earn at the end
of 3 years?
Given:
P = Php 10,000
r = 2.5%
t = 3 years
Solution:
I = Prt
= (10,000) (0.025) (3)
= Php 750
Thus, Issa will earn Php 1,750 worth of interest after 3 years.
Example 2:
JB borrowed Php100 000 from Yani to have his car
repaired. If Yani charges a simple interest of 3%
per annum and JB plans to pay his loan in 6
months, how much interest should JB pay?
Given:
P = Php 100 000
r = 3%
6
t = 6 months or years or 0.5 years
12
Solution:
I = Prt
= (100 000) (0.03) (0.5)
= Php 1500
Solution:
I = Prt
= (520 000) (0.0575) (0.25)
= Php 7 475
Thus, Php 520 000 should be repaid including interest that amounts to
Php 7 475.
Compound Interest
To compute for compound interest, we apply the formula,
𝑟
A = P (1 + )nt
𝑛
Given:
P = Php 1500
r = 4.3%
t = 6 years
n=4
Solution:
0.043 (4)(6)
A = 1500 (1 + )
4
= Php 1 938.84
Thus, Simon invested his money at the rate of 3.25% per year.
Example 3:
How long will it take for an investment of Php 250 000 to
double itself if it is invested at the rate of 8%?
Given:
P = Php250 000
r = 8%
I = Php 250 000
Solution:
𝐼
t=
𝑃𝑟
250000
=
(250000)(0.08)
= 12.5 years or 12 years and 6 months
Where
F = maturity or future value
P = Principal
Is = simple interest
F = P (1 + rt)
Where
F = maturity or future value
P = Principal
r = rate
t = term/ time in years
Example 1:
Find the maturity value if 1 million pesos is deposited in a
bank at an annual simple interest rate of 0.25% after
(a) 1 year and (b) 5 years.
Given:
P = Php 1 000 000
r = 0.25%
(a) After 1 year
Method 1: Method 2:
Is = Prt
= (1000000)(0.0025) (1) F = P (1 + rt)
= 2 500 = (1000000) [1 + (0.0025) (1)]
= 1 002 500
F = P + Is
= 1 000 000 + 2 500 The future or maturity value after 1
= 1 002 500 year is Php 1 002 500
(a) After 5 years
Given:
P = Php 1 000 000
r = 0.25%
Method1: Method2:
Is = Prt F = P (1 + rt)
= (1000000)(0.0025) (5) = (1000000) [1 + (0.0025) (5)]
= 12 500 = 1 012 500
F = P + Is
= 1 000 000 + 12 500 The future or maturity value
= 1 012 500 after 5 years is Php 1 012 500
Maturity (Future Value) of
Compound Interest
F = P (1 + r)t
Where
P = Principal or present value
F = maturity or future value
r = interest rate
t = term/ time in years
Given: Solution:
P = P10 000 F = P (1 + r)t
r = 2% = 10000 (1 + 0.02) 5
t = 5 years = 11, 040.081
Ic = F - P
= Php 11 040.081 – Php 10 000
= 1, 040.081
Compound Interest
P = Future Value
𝑟
(1 + )nt
𝑛
Example1:
What is the present value of Php 50,000 due in 7 years if money
is worth 10% compounded annually?
Given:
Solution:
F = 50,000
P = 50 000
t = 7 years
(1 + 0.10)7
r = 10%
= 25, 657.91
P=?
Group Activity:
1. Complete the table by finding the unknown.
Principal (P) Rate (r) Time (t) Interest (I) Maturity Value
(F)
60 000 4% 15 (1) (2)
To find j:
j = _i_
m
where i = interest
m = number of conversion per year
Example1:
In order to save for her high school graduation, Marie decided to
save P200 at the end of each month. If the bank pays 0.25%
compounded monthly, how much will her money be at the end
of 6 years?
Given:
R = P200
m = 12
i(12) = 0.25% = 0.0025
0.0025
j= = 0.0002083
12
t = 6 years
n = tm = 6(12) = 72 periods
Find F:
Example2:
Suppose Mrs. Remoto would like to save P3,000 at the end of
each month, for six months, in a fund that gives 9% compounded
monthly. How much is the amount of future value of her savings
after 6 months?
Given:
R = P3,000
t = 6 months
i(12) = 9% = 0.09
m = 12
0.09
j= =0.0075
12
n = 6 periods
Find F:
Future Value of General
Annuities
The formula for the future value of general annuity is the same
as that for a simple annuity. The extra step occurs in finding j;
the given interest rate per period must be converted to an
equivalent rate per payment interval.
Example1:
Mel started to deposit P1000 monthly in a fund that pays 6%
compounded quarterly. How much will be in the fund after 15
years?
Given:
R = Php 1000
n = 12 (15) = 180 payments
i4 = 6% = 0.06
m=4
Find F:
Since the payments are monthly, the interest rate of 6%
compounded quarterly must be converted to its equivalent
interest rate that is compounded monthly.
Thus, the interest rate per monthly payment interval is 0.004975
or 0.4975%
Given:
R = P5000
n = 2(10) = 20
i12 = 0.25% = 0.0025
m = 12
Find F:
Convert 0.25% compounded monthly to its equivalent interest
rate for each semi –annual payment interval.
Present Value of Simple
Annuities
The present value of a simple annuity is given by:
Example1:
Suppose Mrs. Remoto would like to know the present value of
her monthly deposit of P3000 when interest is 9% compounded
monthly. How much is the present value of her savings at the
end of 6 months?
Given:
R = P3000
i = 9% = 0.09
j = 0.09/12 = 0.0075
n = 6 months
m = 12
Find P:
Example2:
Find the present value if quarterly payments of P2000 for 5
years with interest rate of 8% compounded quarterly.
Given:
R = P38,973.76
i4 = 8% = 0.08
m=4
n = 3 payments
Find: P
Thus, Ken borrowed P100,000 from Kat.
Example2:
Mrs. Reyes would like to buy a television set payable monthly for
6 months starting at the end of the month. How much is the
cost of the TV set if her monthly payment is P3000 and interest
is 9% compounded semi-annually?
Given:
R = 3000
i(2) = 9% = 0.09
n = 6 payments
m=2
Find P:
Quiz
1. Peter started to deposit P5,000 quarterly in a fund that pays
1% compounded quarterly. How much will be in the fund after 6
years?