COMPOUND INTEREST
Learning Outcome
• At the end of the lesson, the learner is
able to compute interest, maturity value
and present value in compound interest
environment and solve problems
involving compound interest.
Remember me!
• Suppose you won 10 000.00Php 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?
Simple interest with annual rate r
Time Principal Simple Interest Amount after t years
(t) (P) (Maturity Value)
Solution Answer
1
10 000(.02)(1) 200 10 000 + 200 = 10 200
2
10 000(.02)(2) 400 10 000 + 400 = 10 400
10 000
3 10 000(.02)(3) 600 10 000 + 600 = 10 600
4 10 000(.02)(4)
800 10 000 + 800 = 10 800
5 10 000(.02)(5) 1 000 10 000 + 1 000 = 11 000
Compound interest with annual rate r
Time Principal Simple Interest Amount after t years
(t) (P) (Maturity Value)
Solution Answer
1 10 000
10 000(.02)(1) 200 10 000 + 200 = 10 200
2 10 200 10 200(.02)(1) 204 10 200 + 204 = 10 404
10 404(.02)(1)
3 10 404 208.08 10 404 + 208.08 = 10 612.08
10 612.08(.02)(1)
4 10 612.08 212.24 10 612.08 + 212.24 = 10 824.32
5 10 824.32 10 824.32(.02)(1) 216.49 10 824.32 + 216.49 = 11 040.81
Simple Interest ------ 1 000
Compound Interest ------ 1 040.81
What is the difference between simple and
compound interest?
How will you distinguish simple and compound
interest based on the illustrations?
• Simple interest remains constant throughout
the investment term.
• Compound interest, the interest from the
previous year also earns interest. Thus, the
interest grows every year.
Example 2
• Ella and Thelma each invest 10 000 for two
years, but under different schemes. Ella’s
earns 2% of 10 000 the first year, which is 200,
then another 200 the second year. Thelma
earns 2% of 10 000 the first year, which is 200
same as Ella’s. But during the second year, she
earns 2% of the 10 000 and 2% of the 200
also. (in peso)
• Determine the amount of Ella’s
and Thelma’s investment after
two years.
For Ella the amount is 10 400.00
For Thelma the amount is 10 404.00
Why there is a difference between the earnings
of Ella and Thelma?
Maturity (Future) Value and Compound Interest
F = P(1 + r)t
Where
P = principal or present
F = maturity (future) value at the end of the
term
r = interest rate
t = term/time in years
Compound Interest
The compound interest Ic is given by
Ic = F - P
Present Value P at Compound Interest
F t
P F ( 1 r )
(1 r ) t
Where
P = principal or present value
F = maturity (future) value at the end of
the term
r = interest rate
t = term/time in years
Example
• Find the maturity value and interest
if 50 000 is invested at 5%
compounded annually for 8 years.
Find the maturity value and interest if 50 000 is
invested at 5% compounded annually for 8 years.
• Given:
P = 50 000 r = 5% or 0.05 t = 8 years
Find a. maturity value
b. compound Interest Ic
F = P(1+r)t
= (50 000)(1+0.05)8
= 73 872.77
Ic = F – P
= 73 872.77 – 50 000.00
= 23 872.77
Example 3
• Karen bought a ten- year certificate of deposit
for 5000.00Php for which the interest rate is
8% compounded annually. What total interest
will she earn over the ten – year period?
Calculate the interest earned during the first few
years?
• 1st = 5000(.08) = 400
• 2nd = 5400(.08) = 432
• 3rd = 5832(.08) = 466.56
The sequence 400, 432,466.56, …
Exercises
Principal Rate (r) Time (t) Compound Maturity Value
Interest (F)
10 000 8% 15 (1) (2)
3 000 5% 6 (3) (4)
50 000 10.5% 10 (5) (6)
(7) 2% 5 (8) 135 704.04
(9) 9.25 2.5 (10) 100 000
a. What are the amounts of
interest and maturity value of
a loan for 20 000.00Php at 6%
compound interest for 3
years?
b. In order to have 50 000.00Php in 5
years, how much should you invest if
the compound interest is 5%?
c. A savings account in a bank yields
0.25% compound interest annually.
Accumulate (find the future value of)
25 000.00 for 4 years in this savings
account. How much interest will be
gained?
d. In a certain bank, Angel invested 88 000.00 in
a time deposit that pays 0.5% compounded
interest in a year. How much will be her
money after 6 years? How much interest will
she gain?
COMPOUNDING More Than Once A Year
At the end of the lesson, the learner is able to
compute interest, maturity value and present
value in compound interest environment and
solve problems involving compound interest
when compound interest is compounding or
computed more than once a year.
TRY THIS
• Principal of 100.00Php
A. Will earn compound interest rate each day at
5%
B. Will earn compound interest twice a day at a
rate of 2.5%
Observe the compounding effect
TIME(in days) A B
.5 100(1.025)=102.50
(100)(1.05)=105.00
1 102.50(1.025)=105.06
1.5 105.06(1.025)=107.69
(105.00)(1.05)=110.25
2 107.69(1.025)=110.38
2.5 110.38(1.025)=113.14
(110.25)(1.05)=115.76
3 113.14(1.025)=115.97
3.5 115.97(1.025)=118.87
(115.76)(1.05)=121.55
4 118.87(1.025)=121.84
4.5 121.84(1.025)=124.89
(121.55)(1.05)=127.63
5 124.89(1.025)=128.01
Definition of terms
• Conversion or interest period -
MANILA SCIENCE HIGH SCHOOL
LONG TEST #1 (FINALS)
11-FERMAT
I. Match terms in column A with the correct definitions in
Column B. You may choose more than one in Column B.
Column A Column B
(1) Present value A. time money is borrowed
(2) Term B. amount paid or earned for the use of
money
(3) Interest C. percentage of increase of investment
(4) Maturity Value D. amount of money borrowed or invested
(5) Interest rate E. amount added by the lender, to be received
on repayment date
F. amount received on payment date
II. Find the unknown value.
P r t I
360 000 (6) 2 3 600
500 000 10.5% (7) 175 500
880 000 9.25% 2.5 (8)
III. Christian deposited 5 000.00php in a bank that
pays 2% compounded annually . Complete the table
below. (in peso)
Amount at the start Ic Amount at the end
t r
of year t of year t
1 5 000.00 2% 100.00 5 100.00
2 2% (9) (10)
6 2% (11)
10 (12) 2% (13)
14. In problem III, Christian made a withdrawal of
2 001.00Php after 2 years. If no further withdrawal is
made, how much will be in his account after another 3
years?
Problem solving
15.
Compute for the simple interest
on a credit purchase of 30
000.00Php at 8% for 10
months and 15 months
respectively.
16.
The 2013 earthquake in Bohol and Cebu
had a magnitude of 7.2 while the 2012
earthquake that occurred in Negros
Oriental recorded a 6.7 magnitude. How
much more energy was released by
2013 compared to that 2012
earthquake?
