Compound Interest

1. COMPOUND
INTERESTALAN S. ABERILLA

2. COMPOUND
INTEREST - Interest is computed on the principal and also on
the accumulated past
interests.Maturity (Future) Value and
Compound Interest
F = P(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
The compound interest is given
Example 1:
Find the maturity value and the compound
interest if P 10,000.00 is compounded annually at
an interest rate of 2% in 5 years.
Given: P = P 10,000.00 r = 2% = 0.02
t = 5 years
Find: (a) maturity value F (b) compound
interest Ic
Solution:
(a) F = P(1 + r)t (b) Ic = F - P
F = (P 10,000.00)(1 + 0.02)5 Ic = P
11,040.80 – P 10,000.00
F = (P 10,000.00)(1.10408) Ic = P

3. Example 2:
Suppose your father deposited in your bank account P 10,000.00 at an annual
rate of 0.05% compounded yearly when you graduate from kindergarten and
get the amount until you finish Grade 12. How much will you have in your
after 12 years?
Given: P = P 10,000.00 r = 0.5% = 0.005 t = 12 years
Find: future value F
Solution:
F = P(1 + r)t
F = (P 10,000.00)(1 + 0.005)12
F = (P 10,000.00)(1.0616778
F = P 10,616.78

4. Present Value P at Compound
Interest
P = F/(1 + r)t
or
P = F(1 + r)-t
where;
P = principal or present value
F = maturity (future) value at
end of the
term
r = interest rate
t = term/time in years
Example 3:
What is the present value of P 50,000.00
due in 7 years if money is worth 10%
compounded annually?
Given: F = P 50,000.00 r = 10% =
0.1 t = 7 years
Find: present value P
Solution:
(a) P = F/(1 + r)t
P = P 50,000.00/(1 + 0.1)7
P = P 50,000.00)/1.9487171
P = P 25,657.91

5. Activity 3
Complete the table below.
 Use short bond paper (encoded or
handwritten)
 Support your answers with
solutions.Principal
(P)
Rate (r) Time (t) Compoun
d Interest
(Ic)
Maturity
Value (F)
P 8% 12 years (1) (2)
P
12,000.00
5.5% 6 years
9 months
(3) (4)
P
60,000.00
9.75% 10 months (5) (6)
(7) 1% 6 years (8) P
25,000.00
(9) 7.5% 4 years (10) P

6. Assignment 2
VALUING
Compound interest is existing in the business. If you are the
creditor, are you doing the right thing? If you are the
debtor, would you consider this one as proper? Aside from
the income that will be generated by the creditor, what
values can be derived or will be developed on the part of
the debtor?

7. KEEP SAFE
GOOD LUCK
GOD BLESS
Sir A