COMPOUND
INTEREST
Engr. Anthony T. Reyes
COMPOUND INTEREST
𝑛 −𝑛
𝐹 =𝑃 1+𝑖 𝑃 =𝐹 1+𝑖
Nominal Rate (r): Mode of m
Compounding
𝑟 Annually 1
𝑖= Semi-Annually 2
𝑚 Quarterly 4
𝑖 = 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 Bi-Monthly 6
𝑟 = 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Monthly 12
Semi-Monthly 24
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Daily 360
𝑚
Effective Rate (r): 𝐸𝑅 = 1 + 𝑖 −1
𝐹 = 𝑃𝑒 𝑖𝑛
CONTINUOSLY COMPOUNDING INTEREST −𝑖𝑛
𝑃 = 𝐹𝑒
EXAMPLES
1. If ₱5,000.00 shall accumulate for 10 years at 8% compounded
quarterly, find the compounded interest at the end of 10 years?
𝐹 =𝑃 1+𝑖 𝑛
𝑟 4𝑡
𝐹 =𝑃 1+ 𝐼 = ₱11,040.20 − ₱5,000.00
4 4 10
0.08 𝑰 = ₱𝟔, 𝟎𝟒𝟎. 𝟐𝟎
𝐹 = ₱5000 1 +
4
𝐹 = ₱11,040.20
2. John borrowed ₱50,000.00 from the bank at 25% compounded
semi-annually. What is the equivalent effective rate of interest?
𝐸𝑅 = 1 + 𝑖 𝑚 −1
2 𝑬𝑹 = 𝟐𝟔. 𝟓𝟔%
0.25
𝐸𝑅 = 1 + −1
2
EXAMPLES
3. Find the present worth of a future payment of ₱300,000.00 to be
made in 5 years with an interest rate of 8% per annum.
𝐹 =𝑃 1+𝑖 𝑛
₱300,000.00 𝑷 = ₱204,174.96
𝑃=
₱300,000.00 = 𝑃 1 + .08 5 1 + .08 5
4. How long will it take to double money itself if invested at 5%
compounded annually?
𝑛 ln 2 = ln 1 + 0.05 𝑛
𝐹 =𝑃 1+𝑖
2𝑃 = 𝑃 1 + 0.05 𝑛
ln 2 = 𝑛 ln 1 + 0.05 𝒏 = 𝟏𝟒. 𝟐 𝒚𝒆𝒂𝒓𝒔 ≈ 𝟏𝟒 𝒚𝒆𝒂𝒓𝒔
2 = 1 + 0.05 𝑛 ln 2
𝑛=
ln 1 + 0.05
EXAMPLES
5. The amount of $45,000 was deposit in the bank earning an interest
of 7.6% per annum. Determine the total amount at the end of 6
years, if the principal and interest were not withdrawn during the
period?
𝐹 =𝑃 1+𝑖 𝑛
𝑭 = $69,837.09
𝐹 = $45,000 1 + 0.076 6
6. What is the corresponding effective rate of interest of 17.5%
compounded quarterly?
𝐸𝑅 = 1 + 𝑖 𝑚 −1
4 𝑬𝑹 = 𝟏𝟖. 𝟔𝟖%
0.175
𝐸𝑅 = 1 + −1
4
EXAMPLES
7. Compute for the equivalent rate of 5% compounded monthly to a
rate compounded quarterly.
1 1
𝐸𝑅𝑀𝑂𝑁𝑇𝐻𝐿𝑌 = 𝐸𝑅𝑄𝑈𝐴𝑅𝑇𝐸𝑅𝐿𝑌 𝑟 0.05
12 4 12 4
0.05
𝑟 12 𝑟 4 1+ = 1+ 𝑟=4 1+ −1
1+ −1= 1+ −1 4 12 12
12 4 1
12 4
0.05
12
𝑟 4 𝑟 0.05
1+ −1= 1+ −1 = 1+ −1 𝒓 = 𝟓. 𝟎𝟐%
12 4 4 12
8. A sum of $1,000 is invested now and left for 9 years, at which time
the principal is withdrawn. The interest has accrued is left for
another 7 years. If the effective annual interest rate is 5.5%, what
will be the withdrawal amount at the end of 16th year?
𝑎𝑡 𝑓𝑖𝑟𝑠𝑡 9 𝑦𝑒𝑎𝑟𝑠: 𝐴 = $1,619.09 − $1,000 𝑎𝑡 𝑎𝑛𝑜𝑡ℎ𝑒𝑟 7 𝑦𝑒𝑎𝑟𝑠:
𝐹 =𝑃 1+𝑖 9 𝐴 = $619.09 𝐹 =𝑃 1+𝑖 𝑛
9 7
𝐹 = $1,000 1 + .055 𝐹 = $619.09 1 + .055
𝐹 = $1,619.09 𝑭 = $𝟗𝟎𝟎. 𝟓𝟖
EXAMPLES
9. $1,000.00 was deposited in a bank account, 15 years ago. Today it
is worth $3,000.00. Interest is paid bi-monthly. Determine the
interest rate paid on his account. 1 1
90 3000 90
𝐹 =𝑃 1+𝑖 𝑛 𝑟 3000
1+ = 𝑟=6 −1
𝑟 6 15 6 1000 1000
$3,000 = $1,000 1 + 1
6 𝑟 3000 90
3000 𝑟 90
= −1 𝒓 = 𝟕. 𝟑𝟕%
= 1+ 6 1000
1000 6
10.By the condition of a will, the sum of $2,000.00 is left to a girl to
be held in trust fund by her guardian until it amounts to
$50,000.00. When will the girl received the money (in years) if the
fund is invested at 8.5% compounded monthly?
𝐹 =𝑃 1+𝑖 𝑛 50000 0.085
12𝑡 ln = 12𝑡 ln 1 +
0.085 2000 12
$50,000 = $2,000 1 + 𝒏 = 𝟑𝟖𝒚𝒆𝒂𝒓𝒔
12 50000
ln
12𝑡
𝑡= 2000
50000 0.085 0.085
ln = ln 1 + 12 ln 1 +
2000 12 12
PRACTICE
PROBLEMS
PRACTICE PROBLEM (A)
A student plan to deposit $2,000 in the bank now and another $3,000
for the next 2 years. If he plans to withdraw $5,000 two years after his
last deposit for the purpose of buying shoes, what will be the amount
of money left in the bank after two years of his withdrawal? Effective
annual rate is 10%.
$5000 𝐹1 = 𝑃1 1 + 𝑖 𝑛
𝑥 = $6,558.20 − $5,000
𝐹1 = $2,000 1 + 0.10 4
𝑥 = $1,558.20
𝐀 𝐹1 = $2,928.20
0 1 2 3 4 5 6 𝑛 𝐴=𝑥 1+𝑖 𝑛
𝐹2 = 𝑃2 1 + 𝑖
2 𝐴 = $1,558.20 1 + 0.10 2
𝐹2 = $3,000 1 + 0.10
$2000
𝐹2 = $3,630.00
𝑃1
$3000
𝑨 = $𝟏, 𝟖𝟖𝟓. 𝟒𝟐
𝐹 = 𝐹1 + 𝐹2
𝑃2
𝐹 = $2,928.20 + $3,630.00
𝐹 = 𝐹1 + 𝐹2 𝐹 = $6,558.20
PRACTICE PROBLEM (B)
A student plan to deposit $1,500 in the bank now and another $3,000
for the next 2 years. If he plans to withdraw $5,500 three years after
his last deposit for the purpose of buying shoes, what will be the
amount of money left in the bank after two years of his withdrawal?
Effective annual rate is 10%.
$5500 𝐹1 = 𝑃1 1 + 𝑖 𝑛
𝑥 = $6,408.77 − $5,500
5
𝐹1 = $1,500 1 + 0.10 𝑥 = $908.77
𝐀 𝐹1 = $2,415.77
0 1 2 3 4 5 6 7 𝑛 𝐴=𝑥 1+𝑖 𝑛
𝐹2 = 𝑃2 1 + 𝑖
3 𝐴 = $908.77 1 + 0.10 2
𝐹2 = $3,000 1 + 0.10
$1500
𝐹2 = $3,993.00
𝑃1
$3000
𝑨 = $𝟏𝟎𝟗𝟗. 𝟔𝟏
𝐹 = 𝐹1 + 𝐹2
𝑃2
𝐹 = $2,415.77 + $3,993.00
𝐹 = 𝐹1 + 𝐹2 𝐹 = $6,408.77
PRACTICE PROBLEM (C)
A student plan to deposit $1,500 in the bank now and another $3,000
for the next 2 years. If he plans to withdraw $4,500 three years after
his last deposit for the purpose of buying shoes, what will be the
amount of money left in the bank after one year of his withdrawal?
Effective annual rate is 10%.
$4500 𝐹1 = 𝑃1 1 + 𝑖 𝑛
𝑥 = $6,408.77 − $4,500
5
𝐹1 = $1,500 1 + 0.10 𝑥 = $1,908.77
𝐀 𝐹1 = $2,415.77
0 1 2 3 4 5 6 𝑛 𝐴=𝑥 1+𝑖 𝑛
𝐹2 = 𝑃2 1 + 𝑖
3 𝐴 = $1,908.77 1 + 0.10 1
𝐹2 = $3,000 1 + 0.10
$1500
𝐹2 = $3,993.00
𝑃1
$3000
𝑨 = $𝟐, 𝟎𝟗𝟗. 𝟔𝟓
𝐹 = 𝐹1 + 𝐹2
𝑃2
𝐹 = $2,415.77 + $3,993.00
𝐹 = 𝐹1 + 𝐹2 𝐹 = $6,408.77
THANK YOU
and
GOD BLESS
