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Presenter:

Ms. Mikee Sim


Fat simple interest = Fat compound interest

n
j
1 1
r m
t
1
j m 1 rt n 1

What simple interest rate is equivalent to
6.75% compounded semi-annually in a 2-
year transaction?

Given: j=6.75%; m=2; t=2 years

Required: r = ?
Solution: j
n

1 1
m
r
t
4
0.0675
1 1
2
r 0.0710 7.10%
2
Answer: A simple interest rate of 7.10% is
equivalent to a nominal rate of 6.75%
compounded semi-annually.
What nominal rate compounded semi-
annually is equivalent to 3.5% simple
interest rate in a 3-year transaction?

Given: r=3.5%; m=2; t=3 years

Required: j = ?
Solution:

1
j m 1 rt 1
n


1

j 2 1 0.035(3) 6 1 0.0336 3.36%

Answer: The nominal rate of 3.36% compounded


semi-annually is equivalent to 3.5% simple interest.
Fat simple discount rate = Fat a nominal rate

n
j
1 1
d m
n
j
t 1
m
1

1 n
jm 1
1 dt

What simple discount rate d, is equivalent
to 11.25% compounded quarterly in a 1-
year transaction?

Given: j=11.25%; m=4; t=1 year

Required: d = ?
n
Solution: j
1 1
m
d n
j
t 1
m
4
0.1125
1 1
4
d 4
0.1050 10.5%
0.1125
1 1
4

Answer: A nominal rate of 11.25% compounded


quarterly is equivalent to 10.50% simple discount
rate.
What nominal rate j, compounded monthly
is equivalent to 10.5% discount rate in a 2-
year transaction?

Given: d=10.5%; m=12; t=2 years

Required: j = ?
Solution:

1

1 n
jm 1
1 dt

1

1 24
j 12 1 11.84%
1 (0.105)(2)

Answer: A nominal rate of 11.84% compounded
monthly is equivalent to 10.50% simple discount rate.
What is the nominal rate that, if compounded
semi-annually, is equivalent to the accumulated
simple interest rate of 7% in an 8-year
transaction?

What is the simple discount rate that is


equivalent to a nominal rate of 8.60%
compounded semi-annually in an 8-year
transaction?
Finding the value of an obligation
due at different dates.
Compound amount
Discount F = find P on t years
before due date
Accumulate P = find F
STEPS IN FINDING THE VALUE
OF AN OBLIGATION AT ANY
DATE:
1.Solve for the amount (F) of F = P(1+rt) Simple Int. Rate
the given obligation F = P(1+i)n Nominal Rate
2.Plot the value of F on the
due date specified in the
problem on a time diagram
3.To find the value of the
O = F(1+i)n F treated as P
obligation at any date AFTER
i moneys worth
the due date, accumulate F
4.To find the value of the
obligation at any date O = F(1+i)-n F treated as F
BEFORE the due date, i moneys worth
discount F
A P65,000 obligation due in 2 years bears
interest of 21% compounded monthly. If
money is worth 5% compounded semi-
annually, find the value of this obligation
a)At the end of 2 years
b)Now
c)In 4 years
If money is worth 10% compounded
semiannually, and the end of 8 years is the
comparison date, which obligation is more
valuable?
Obligation A: P30,000 due without interest
at the end of 8 years.
Obligation B: P16,600 due at the end of 4
years with accumulated interest from today
at 8% compounded semiannually
A P1.25 million loan due at the end of 5
years bears 30% simple interest. If the
prevailing moneys worth is 16%
compounded quarterly, what is the value
of this obligation:
a.) at the end of 10 years?
b.) at the end of 2 years and 9 months?
c.) at the beginning of 8 years?
d.) at present?
Equation of values is an equation that
shows that one set of values is equal
to another set on the same
comparison date.

Payment / s Obligation / s
STEPS:
1.Draw a time diagram specifying the periods

2.Write the payment/s ABOVE the time diagram on the


specified dates and the obligations BELOW
3.Choose a comparison date

4.Bring the payment/s and obligation/s to the chosen


comparison date
5.Let x be the unknown payment

6.Set the equation of values

7.Solve for the unknown variable

Payment / s Obligation / s
Mrs. Cabrera borrowed P15,000 from EOL Lending
Corporation due in 5 months with accumulated
interest from present at 10% compounded monthly.
Three months before the loan is due, Mrs. Cabrera
received her stock dividends from her investments.
She decided to pay her debt on the same day she
received her dividends. How much should she pay
EOL Lending Corporation if the value of money at
that time is 6.5% compounded semi-annually? Use
the present time (t=0) as comparison date.
Different interest rates are applied during
the entire term of investment.
Maturity value at the preceding rate is
computed first before applying the
subsequent rate.
Maturity value at the previous rate is used
as the principal or present value of the new
rate.
Example 2.17
An investor placed P100,000 in a fund that
pays 10% compounded semi-annually for
the first five years, 8% effective for the next
five years and 8% compounded quarterly
for every year in excess of ten years. If the
money was invested for 12 years, how
much was in the fund at the end of the
term?
Interest that is compounded frequently such
as everyday, every hour, every minute or
every second.
Slightly increases the compound amount.

F = Pejt
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to 2.71828
F = Pejt
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to
2.71828

Exercise 2.18
Find the amount of a P10,000 investment at the
end of 4 years if it is invested at a rate of 5.5%
compounded continuously.