BUSANA1

 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. Yalung’s
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. Yalung’s 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 period  Compound Amount

j
i= - F = P ( 1 + i )n
m
1  1

 F 
F j     1 m

n
n
i    1  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   68500 
j     1 m
n
   11
2
j 
 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 ½ years?
  Total number of  Compound Amount
conversion periods

n=tm F = P ( 1 + i )n

F F
log   log  
 P t  P
n
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  
t  24000 
 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 be compounded
of increase of annually is
converted
the investment equivalent to a
several times
 Computed nominal rate j,
per year compounded
ONLY once for
the entire term m times a year

I=Prt  1
 m
F
j     1 m

n
 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???

F E = 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 
 j 
1
(1  w) m
 1  
 m
 j 
1
(1  w) m
 1  1   1
 m
1
j
(1  w) m
1 
m
 1

j  m (1  w)  1
m

 
 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 = F 2

 m2

  j2  1 
m
j1  m1 1    1
 m2  
 
 m1

 
j2  m2 1  1   1
j m2

 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  1 
m
j1  m1 1    1
 m2  
 
 4

 0.20 
  1
2
j1  2 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 
w A  1    1  0.0506 wB  1    1  0.0459
 2   12 

Since Bank B’s effective rate is less than Bank A’s 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 ½ %
compounded semi-annually; (b) 8 ½ %
compounded quarterly; and (c) 8 ½ % effective
rate?