MODULE 2:

COMPOUND INTEREST
F = P(1 + 𝑖)𝑛
𝑖 𝑚𝑛 Different modes of Occurrence m
F=𝑃 1+ compounding
𝑚
Annually Every 12 months 1

where: Semi- Annually Every 6 months 2

F = Future value of the deposit Quarterly Every 3 months 4
P = Principal or amount of money Bimonthly Every2 months 6
deposited Semi- Quarterly Every 1.5 months 8
I = annual interest rate (in decimal Monthly Every month 12
form)
Semi- Monthly Every o.5 months 24
m = number times the money is
compounded per year Weekly Every week 52

n = number of period in years Bi-Weekly Every 2 weeks 26

 CONTINUOUS COMPOUNDING

F = P𝑒 𝑖𝑛 𝑒 𝑖𝑛 =
𝑖 -continuous compounding
ER = 𝑒 − 1 compound amount factor

Where:
F- Future amount
P- Principal or capital amount
i- annual rate of interest
n- number of years
ER- effective rate of interest
EFFECTIVE RATE OF INTEREST

𝑁𝑅 𝑚
ER = 1 + −1
𝑚

where:
ER = Effective rate
NR = Nominal rate
m = number of period per years
𝑁𝑅
i= (ER per compounding period)
𝑚
 SAMPLE PROBLEM
1. John borrowed P50,000.00 from the bank at 25%
compounded semi-annually. What is the equivalent effective
rate of interest?
a)25.56%
b) 26.56% 𝑁𝑅 𝑚
ER = 1 + −1
𝑚
c)21.66%
d)12.56%
Ans: 26.56%
 SAMPLE PROBLEM
2. Find the present worth of a future payment of P300,000
to be made in 5 years with an interest rate of 8% per
annum.
a) P204,174.96
b) P200,174.96 F = P(1 + 𝑖)𝑛

c) P240,174.96
d) P217,404.96
Ans: P204,174.96
 SAMPLE PROBLEM
3. How long will it take money to double itself if invested at
5% compounded annually?
a) 7 years
b) 28 years
F = P(1 + 𝑖)𝑛
c) 14 years
d) 21 years

Ans: 14 years
 SAMPLE PROBLEM
4. The amount of P50,000 was deposit in the bank earning an
interest of 7.5% per -annum. Determine the total amount at the end
of 5 years, if the principal and interest were not withdrawn during the
period?
a) P71,781.47
F = P(1 + 𝑖)𝑛
b) P72,475.23
c) P70,374.90
d)P78,536.34
Ans: P71,781.47
 SAMPLE PROBLEM
5. Find the present worth of a future payment of P100,000
to be made in 10 years with an interest of 12% compounded
quarterly.
a) P30,444.44
b) P33,000.00 F = P(1 + 𝑖)𝑛

c) Р30,655.68
d) P30,546.01
Ans: Р30,655.68
 SAMPLE PROBLEM
6. Compute the equivalent rate of 6% compounded semi-
annually to a rate compounded quarterly.
a) 5.96%
b) 6.04%
compounded semi-annually = compounded quarterly.
c) 5.92%
d) 6.06% 𝑁𝑅 𝑚 𝑁𝑅 𝑚
1+ = 1+
𝑚 𝑚

Ans: 5.96%
 SAMPLE PROBLEM
7. A student plan to deposit P1,500 in the bank now and another P3,000
for the next 2 years. If he plans to withdraw P5,000 3 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
interest rate is 10%
F = P(1 + 𝑖)𝑛
a) P1,408.76
b) P2958.42
c) P1,576.52
d) P1,549.64
Ans: P1,549.64
 SAMPLE PROBLEM
8. A certain amount was deposited 5 years and 9 months ago at an
interest of 8% compounded quarterly. If the sum now is P315,379.85,
how much was the amount deposited?
a. P200,000
b. P180,000 𝑖 𝑚𝑛
F=𝑃 1+
𝑚
c. P240,000
d. P260,000
Ans: P200,000
 SAMPLE PROBLEM
9. A man wishes to have P40,000 in a certain fund at the end of 8 years.
How much should he invest in a fund that will pay 6% compounded
continuously?
a. P24,751.34 c. P28,864.36
b. P36,421.44 d. P30,468.42

Ans: a. P24,751.34 F = P𝑒 𝑖𝑛
 SAMPLE PROBLEM
10. Find the time required for a sum of money to triple itself at 5% per
annum compounded continuously.
a. 21.97 years c. 18.23 years
b. 25.34 years d. 23.36 years

Ans: a. 21.97 years

F = P𝑒 𝑖𝑛
 SAMPLE PROBLEM
11. If the effective annual interest rate is 4%, compute the equivalent
nominal annual interest compounded continuously.
a. 3.92% c. 3.80%
b. 4.10% d. 4.09%

Ans: a. 3.92%
ER = 𝑒 𝑖 − 1
 SAMPLE PROBLEM
12. Compute the effective annual interest rate which is equivalent to 5%
nominal annual interest compounded continuously.
a. 3.92% c. 5.13%
b. 4.10% d. 4.09%

Ans: 5.13%
ER = 𝑒 𝑖 − 1
 SEATWORK
1. In how many years is required for P2,000 to increase by
P3,000 if interest at 12% compounded semi-annually ?
a) 7 years
b) 8 years
F = P(1 + 𝑖)𝑛
c) 9 years
d) 10 years

Ans: 8 years
 SEATWORK
2. If P5000.00 shall accumulate for 10 years at 8%
compounded quarterly. Find the compounded interest at the
end of 10 years.
a) P6,005.30
b) P6,000.00 F = P(1 + 𝑖)𝑛
c) P6,040.20
d) P 11,040.20
Ans: P6,040.20
 SEATWORK
3. P1,500.00 was deposited in a bank account, 20 years
ago. Today it is worth P3,000.00. Interest is paid semi-
annually. Determine the interest rate paid on this account?
a) 3%
b) 2.9%
𝑖 𝑚𝑛
c) 3.5% F=𝑃 1+
𝑚
d) 4%
Ans: 3.5%
 SEATWORK
4. A couple borrowed P4000 from a lending company for 6 years
at 12%. At the end of 6 years, it renews the loan for the amount
due plus P4000 more for 3 years at 12%.
What is the lump sum due?
F = P(1 + 𝑖)𝑛
a) P14,842.40
b) P16,712.03
c) P12,316.40
d) P15,382.60
Ans: b) P16,712.03
 SEATWORK
5. American Express Corp. charges 1.5% interest per
month, compounded continuously on the unpaid balance
purchases made on this credit card. Compute the effective
rate of interest.
a. 19.72% c. 21.20%
b. 16.18% d. 19.90%

Ans: a. 19.72% ER = 𝑒 𝑖 − 1
ASSIGNMENT (DUE: FEB.22, 11:59 PM)
1. How many years will P100,000 earned a compound interest of P50000
if the interest rate is 9% compounded quarterly?
2. A firm borrows P2000 for 6 years at 8%. At the end of 6 years, it
renews the loan for the amount due plus P2000 more for 2 years at 8%.
What is the lump sum due?
3. You need P4000 per year for four years to go to college. Your father
invested P5000 in 7% account for your education when you were born. If
you withdraw P4000 at the end of your 17th, 18th, 19th and 20th birthday,
how much money will be left in the account at the end of the 21st year?
4. P300,000 was deposited at a rate of interest of 6% compounded
monthly. After how many years will the compound interest be
P129,613.28?