This document discusses compound interest concepts including formulas, sample problems, and assignments. It covers compound interest calculated periodically as well as continuously. Key points include:
- Compound interest means interest is earned on previous interest amounts as well as the principal.
- Formulas are provided to calculate future values and present worth based on the principal, interest rate, and number of periods.
- Sample problems demonstrate calculating equivalent interest rates and determining future or present values.
- Assignments provide additional practice problems applying compound interest concepts.
This document discusses compound interest concepts including formulas, sample problems, and assignments. It covers compound interest calculated periodically as well as continuously. Key points include:
- Compound interest means interest is earned on previous interest amounts as well as the principal.
- Formulas are provided to calculate future values and present worth based on the principal, interest rate, and number of periods.
- Sample problems demonstrate calculating equivalent interest rates and determining future or present values.
- Assignments provide additional practice problems applying compound interest concepts.
This document discusses compound interest concepts including formulas, sample problems, and assignments. It covers compound interest calculated periodically as well as continuously. Key points include:
- Compound interest means interest is earned on previous interest amounts as well as the principal.
- Formulas are provided to calculate future values and present worth based on the principal, interest rate, and number of periods.
- Sample problems demonstrate calculating equivalent interest rates and determining future or present values.
- Assignments provide additional practice problems applying compound interest concepts.
This document discusses compound interest concepts including formulas, sample problems, and assignments. It covers compound interest calculated periodically as well as continuously. Key points include:
- Compound interest means interest is earned on previous interest amounts as well as the principal.
- Formulas are provided to calculate future values and present worth based on the principal, interest rate, and number of periods.
- Sample problems demonstrate calculating equivalent interest rates and determining future or present values.
- Assignments provide additional practice problems applying compound interest concepts.
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CE 213 – ENGINEERING
ECONOMICS COMPOUND INTEREST
• the interest earned by the principal which is added to the principal
will also earn interest for the succeeding periods. • In calculations of compound interest, the interest for an interest period is calculated on the principal plus the total amount of interest accumulated in previous periods. Thus, compound interest means “interest on top of interest” FORMULAS
Interest Period Principal Interest Earned Compound Amount at the period
1 ) 2
Where: = present worth or principal
= compound amount at the end of “” periods = rate of interest = no. of periods = Single Payment Compound Amount Factor COMPOUND INTEREST • Rate of Interest • Nominal Rate of Interest – specifies the rate of interest and a number of interest periods in one year
• Where: = rate of interest per interest period
• = nominal interest rate • = number of compounding periods per year. • Effective Rate of Interest – effective rate of interest is the actual exact rate of interest on the principal during one year. SAMPLE PROBLEMS
1. John borrowed from the bank at compounded semi-annually.
What is the equivalent effective rate of interest? 2. The amount of was deposited in the bank earning an interest of per annum. Determine the total amount at the end of 5 years, if the principal and interest were not withdrawn during the period. 3. Find the present worth of a future payment of to be made in 10 years with an interest of 12% compounded quarterly. 4. How many years is required for to increase by if interest at compounded semi-annually? ASSIGNMENT
1. Find the present worth of a future payment of to be made in 5 years with an interest rate of per annum. 2. What is the corresponding effective interest rate of compounded semi-quarterly? 3. Compute the equivalent rate of compounded semi-annually to a rate compounded quarterly. 4. A merchant puts in his to a small business for a period of six years. With a given interest rate on the investment of per year, compounded annually, how much will he collect at the end of the sixth year? 5. The amount of at compounded quarterly is 6. A man expects to receive in 8 years. How much is that money worth now considering interest at compounded quarterly. ASSIGNMENT
7. At an interest rate of compounded annually, how much will a deposit of be in 15
years? 8. How many years will earned a compound interest of if the interest rate is compounded quarterly? 9. The effective rate of compounded semi-annually is: 10. How much must be invested on January 1, 2017 in order to accumulate on January 1, 2022? Money worth 6%. QUIZ
1. Find the present worth of a future payment of to be made in 5 years with an
interest of 10% compounded quarterly. 2. How many years is required for to increase by if interest at compounded semi- annually? 3. The amount of was deposited in the bank earning an interest of per annum. Determine the total amount at the end of 5 years, if the principal and interest were not withdrawn during the period. 4. Alex borrowed from the bank at compounded semi-annually. What is the equivalent effective rate of interest? CONTINUOUS COMPOUNDING
It is assumed that cash payments occur once per year, but the compounding is continuous throughout the year. FORMULAS • Present Worth • Present Worth Factor
• Where: P = present worth
• Effective Annual Interest • F = future worth • r = rate of continuous compound interest • Where: = effective annual interest • n = no. of periods rate • Future Worth • = nominal rate of interest compounded continuously
• Compound Amount Factor
SAMPLE PROBLEMS
1. A nominal interest of compounded continuously is given on the
account. What is the accumulated amount of after 10 years? 2. If the effective annual interest is compute the equivalent nominal annual interest compounded continuously. 3. American Express Corp. charges interest per month, compounded continuously on the unpaid balance purchases made on this credit card. Compute the effective rate of interest. 4. What is the nominal rate of interest compounded continuously for 8 years if the present worth factor is equal to 0.6187835? ASSIGNMENT
1. Compute the effective annual interest rate which is equivalent to 5% nominal annual interest compounded continuously. 2. What is the nominal rate of interest compounded continuously for 10 years if the compound amount factor is equal to 1.34986? 3. If the nominal interest is 12% compounded continuously, compute the effective annual rate of interest. 4. If the effective interest rate is 24%, what nominal rate of interest is charged for a continuously compounded loan? 5. Compute the difference in the future amount of P500 compounded continuously for 5 years at the same rate. ASSIGNMENT
6. If the rate of interest is 7% per annum, compounded continuously, after how many years will a deposit be tripled? 7. What nominal interest rate compounded continuously is equivalent to an effective rate of 10% per annum? 8. An investment earning a nominal annual interest of 10% compounded continuously, accumulated to a sum of P800,000 at the end of 15 years. What was the original investment? 9. What nominal annual interest rate compounded continuously is equivalent to an effective annual interest rate of 5% 10. A nominal annual rate of interest rate of 6% compounded continuously is equivalent to an effective annual interest rate of? QUIZ
1. After how many years will an amount double, if the rate of interest is 5% per annum, compounded continuously? 2. An investment of P250,000 earns a nominal annual interest of 6% compounded continuously. Find its accumulated sum at the end of 5 years. 3. P100,000 is placed in an investment that earns a nominal interest of 4% compounded continuously. How much will the accumulated sum be after 10 years? 4. How much should you place in an investment that earns a nominal rate of 7%, compounded continuously, to accumulate P1 million in 20 years?
