Compound-Interest

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Compound Interest

The simple interest method discussed is restricted mostly to loans and


interest-earning investments. The compound interest method is employed in virtually all
instances, where the duration exceeds one year.

The basic concepts of maturity value of money, future value, present value, and
equivalent payments that were developed in a simple interest context, have similar
interpretations and significance in a compound interest environment.

The principle of compound interest is applied in long-term loans. Banks and other
financial institutions generally pay compound interest on deposits in a savings account to
encourage their depositors to invest and accumulate for a long period of time.

Conversion Period (Compounding Period/Interval period)


- the time interval between succeeding interest calculations .
Compound Frequency (Conversion Frequency)
- is the number of compounding that takes place in a year.
Compounding or No. Of Compounding or
Conversion compounding or conversion periodic
frequency conversions per
year
Annual 1 1 year m=1
Semiannual 2 6 months m=2
Quarterly 4 3 months m=4
Bimonthly 6 2 months m=6
Monthly 12 1 month m=12,

Nominal Interest
- is the stated annual interest rate on which the compound interest calculations is
based.
Periodic Interest rate
- is the rate of of interest earned in one conversion period.

Variables in mathematical Treatment of Compound Interest:


P = Principal amount of the loan/investment
I = Amount of interest paid or received
F = maturity value of the loan or investment
j= Nominal interest rate
m= Number of Conversions per year
t=Time period (term) of the loan/investment
I=Periodic interest rate
n=number of conversions of the loan

Computing Compound Interest Problem

Example 1: Alma puts 100,000 in a saving account paying 8% annual interest compound
monthly. At this rate, how much money will be in the account after 4 years?

Solution:
Given: P= 100,000 r=(8%)0.08 m=12 (the annual interest) t=4 F=?
Example 2: Find the maturity value and interest if 10,000 is deposited in a bank at 4%
rate compounded monthly for 4 years?

Solution:
Given: P=10,000 r=4% (0.04) m=12 t=4

Example 3: Find the interest earned at the end of 4 years if 36,700 pesos is invested at
12% compounded bimonthly.
Solution:

Given: P=36,700 r=0.12 m=6 t=4 years

Let’s Try This

Direction:Write your answer in 1/2 crosswise and answer directly. Put your class
schedule and the date for today, as this will serve as your attendance. Assigned
someone to collect and put on my table in CTEd Bldg.Faculty Room 1. Enjoy answering
and DON’T FORGET TO SMILE :)

1. What will be the maturity value of 12,000 pesos invested for 4 years at 15%
compounded quarterly?

2. Salome paid 8,600 pesos on a loan made 2 years before 6% compounded bimonthly.
Find the interest generated.
Clue: begin by solving the value of P(Principal)

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