Presenter:
Ms. Mikee Sim
Fat simple interest = Fat compound interest
j
1 1
m
r
t
1
j m 1 rt n 1
What simple interest rate is equivalent to
6.75% compounded semi-annually in a 2year transaction?
Given: j=6.75%; m=2; t=2 years
Required: r = ?
Solution:
j
1
m
r
t
1
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 semiannually 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:
j m 1 rt 1
j 2 1 0.035(3) 6 1 0.0336 3.36%
1
n
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
j
1 1
m
d
n
j
t 1
m
n
1
jm
1
1 dt
What simple discount rate d, is equivalent
to 11.25% compounded quarterly in a 1year transaction?
Given: j=11.25%; m=4; t=1 year
Required: d = ?
Solution:
t 1
m
1
n
0.1125
1
4
d
0.1050 10.5%
4
0.1125
1 1
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 2year transaction?
Given: d=10.5%; m=12; t=2 years
Required: j = ?
Solution:
jm
1 dt
1
n
j 12
1 (0.105)(2)
1
24
1 11.84%
Answer: A nominal rate of 11.84% compounded
monthly is equivalent to 10.50% simple discount rate.
Find the nominal rate, which if compounded
monthly, is equivalent to 8 % compounded (a)
semi-annually; (b) quarterly.
Find the nominal rate which, if compounded semiannually, is equivalent to the accumulated simple
interest rate of 7% in an 8-year transaction.
Find the simple discount rate that is equivalent to
a nominal rate of 8.60% compounded semiannually 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
the given obligation
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
obligation at any date AFTER
the due date, accumulate F
4.To find the value of the
obligation at any date
BEFORE the due date,
discount F
F = P(1+rt) Simple Int. Rate
F = P(1+i)n Nominal Rate
O = F(1+i)n F treated as P
i moneys worth
O = F(1+i)-n F treated as F
i moneys worth
STEPS IN FINDING THE
VALUE OF AN
OBLIGATION AT ANY
DATE:
1.Solve for the amount
(F) of the given
obligation
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
obligation at any date
AFTER the due date,
accumulate F
4.To find the value of the
obligation at any date
BEFORE the due date,
discount F
F = P(1+rt) Simple
Int. Rate
F = P(1+i)n Nominal
Rate
O = F(1+i)n
O = F(1+i)-n
Example 2.14
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
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
Example 2.17
Mrs. Cabrera borrowed P15,000
from EOL Lending Corporation
due in 5 months with
accumulated interest from
today at 10% compounded
monthly. Three months before
the loan is due, Mrs. Cabrera
won in a lottery game. She
decided to pay her debt on the
same day she won the lottery.
How much should she pay EOL
Lending Corporation if the
value of money at that time is
6.5% compounded semiannually? 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 2.23
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 2.24
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.
