P OU N DI NG M O RE

COM
TH A N O N CE A YE A R
PRELIMINARY
Assuming you will deposit P100 into four different jars.
Jar 1: It will earn compound interest each day at a rate of 12%.
Jar 2: It will earn compound interest twice a day at a rate of 6%
Jar 3: It will earn compound interest 3 times a day at a rate of 4%
Jar 4: It will earn compound interest 6 times a day at a rate of 2%

PREPARED BY: SIR KIKO 2 07/31/2020

ACTIVITY
Time (in days) Group 1’s Group 2’s Group 3’s Group 4’s
investment investment investment investment
1/6
2/6
3/6
4/6
5/6
1

PREPARED BY: SIR KIKO 3 07/31/2020

INTRODUCTORY PROBLEM
Given a principal of P10,000, which of the following options
will yield greater interest after 5 years?
Option A: Earn an annual interest rate of 2% at the end of the
year
Option B: Earn an annual interest rate of 2% in two portions –
1% after 6 months and 1% after another 6 months

PREPARED BY: SIR KIKO 4 07/31/2020

SOLUTION: COMPOUNDED ANNUALLY
Principal = P10,000
Annual Interest rate = 2%, compounded
Time (t) in years annually
Amount at the end of the year
1 10,000(1.02)=10,200
2 10,200(1.02)=10,404
3 10,404(1.02)=10,612.08
4 10,612.08(1.02)=10,824.32
5 10,824.32(1.02)=11,040.81

PREPARED BY: SIR KIKO 5 07/31/2020

SOLUTION: COMPOUNDED EVERY 6
MONTHS Principal = P10,000
Annual Interest rate = 2%, compounded semi
Time (t) in years -annually
Amount at the end of the year
½ 10,000(1.01)=10,100
1 10,100(1.01)=10,201
1½ 10,201(1.01)=10,303.01
2 10,303.01(1.01)=10,406.04
2½ 10,406.04(1.01) = 10,510.10
3 10,510.10(1.01) = 10,615.20
3½ 10,615.20(1.01) = 10,721.35
4 10,721.35(1.01) = 10,828.56
4½ 10,828.56(1.01) = 10,936.85
5 10,936.85(1.01) = 11,046.22

PREPARED BY: SIR KIKO 6 07/31/2020

NOTE
Interest is often compounded more than once a year (semi –
annually, quarterly, and daily.) If all else is equal, a more frequent
compounding will result in a higher interest. Under Option B, because
interest is compounded twice a year, the conversion period is 6
months, the frequency of conversion is 2. Because it runs for 5 years,
the total number of conversion periods is 10. The nominal rate is 2%
and the rate of interest for each conversion period is 1%.

PREPARED BY: SIR KIKO 7 07/31/2020

DEFINITION OF TERMS
Conversion or Interest period – the time between successive conversions
of interest
Frequency of conversion (m) – number of conversion periods in one year

• 
Nominal rate ( – annual rate of interest
Rate of interest for each conversion period

Total number of conversion periods (n)

PREPARED BY: SIR KIKO 8 07/31/2020

RATE NOTATION

Previously, r was used to denote the interest

rate. Now that an interest rate can refer to two
•  
rates (either nominal or rate per conversion
period), the symbols and will be used instead

PREPARED BY: SIR KIKO 9 07/31/2020

EXAMPLE
= Nominal rate m = Frequency of j = Interest Rate per One conversion
(Annual Interest Rate) Conversions conversion period period
2% compounded annually; 1 % 1 year
2% compounded semi-annually; 2 6
2 6 months
months
2% compounded quarterly; 4 3 months
2% compounded monthly; 412 13month
months
2% compounded daily; 365 1 day
12 1 month

365 1 day

PREPARED BY: SIR KIKO 10 07/31/2020

MATURITY VALUE
From the formula of future value of an
amount compounded annually

• 
Since
 Where:
F = maturity (future) value

•the rate for each conversion period isnominal rate of interest (annual rate)
P = principal

•in t years, interest is compounded m = frequency of conversion

times
t = term / time in years
The maturity value then is

PREPARED BY: SIR KIKO 11 07/31/2020

ILLUSTRATIVE EXAMPLE 1

Find the maturity value and interest if

P10,000 is deposited in a bank at 2%
compounded quarterly for 5 years.

PREPARED BY: SIR KIKO 12 07/31/2020

 SOLUTION Find the maturity value and interest if P10,000 is deposited in a
bank at 2% compounded quarterly for 5 years.

Given:

Find: a.) F b.)

i. Interest rate in a conversion period

• 
ii. Total number of conversion periods

iii. Maturity value

iv. Compound Interest

PREPARED BY: SIR KIKO 13 07/31/2020

ILLUSTRATIVE EXAMPLE 2
Find the maturity value and interest if P10,000 is deposited in a
bank at 2% compounded monthly for 5 years.

•Ans: 

PREPARED BY: SIR KIKO 14 07/31/2020

ILLUSTRATIVE EXAMPLE 3
Cris borrows P50,000 and promises to pay the
principal and interest at 12% compounded
monthly. How much must he repay after 6
years?
Ans: P102,354.97
PREPARED BY: SIR KIKO 15 07/31/2020
PRESENT VALUE P @COMPOUND
INTEREST

Where:
F = maturity (future) value

• 
P = principal
=nominal rate of interest (annual rate)
m = frequency of conversion
t = term / time in years

PREPARED BY: SIR KIKO 16 07/31/2020

ILLUSTRATIVE EXAMPLE 1

Find the present value of P50,000 due in

4 years if money is invested at 12%
compounded semi – annually.

PREPARED BY: SIR KIKO 17 07/31/2020

SOLUTION Find the present value of P50,000 due in 4 years if money is
invested at 12% compounded semi – annually.

Given:
F = P50,000 t = 4 years
Find: P

• 
i. Interest rate per conversion period

ii. Total number of conversion periods

iii. Present value

PREPARED BY: SIR KIKO 18 07/31/2020

ILLUSTRATIVE EXAMPLE 2
What is the present value of P25,000 due
in 2 years and 6 months if money is
worth 10% compounded quarterly?
Ans: P19,529.96
PREPARED BY: SIR KIKO 19 07/31/2020
SEATWORK
Complete the table by computing the interest rate per period and
total number of conversion periods.
Interest Frequency of Interest Rate per
Nominal Rate
Compounded Conversion (m) Conversion period
12% Semi – annually (a) (b)
16% Quarterly (c) (d)
9% Monthly (e) (f)
(g) Daily (h) 0.03%

PREPARED BY: SIR KIKO 20 07/31/2020

SEATWORK
1.Accumulate P15,000 for 2 years at 15% compounded monthly
2.How much should Kaye set aside and invest in a fund earning 2%
compounded quarterly if she needs P75,000 in 15 months?
3.Peter is planning to invest P100,000. Bank A is offering 5%
compounded semi – annually while Bank B is offering 4.5%
compounded monthly. If he plans to invest this amount for 5 years,
in which bank should he invest?

PREPARED BY: SIR KIKO 21 07/31/2020

CONTINUOUS COMPOUNDING
Interest can be compounded continuously like every hour, every
minute or even a fraction of a second. If the number of
compounding m is to be increased without bound, this procedure
• 
approaches what is called continuous compounding.
If a principal P is invested at annual interest rate compounded
continuously, then the amount F at the end of t years is given by

PREPARED BY: SIR KIKO 22 07/31/2020

ILLUSTRATIVE EXAMPLE
Suppose you invested P20,000 at 3% compounded
continuously. How much will you have from this
•
investment
  after 6 years?
Given: P = 20,000 t = 6 years
Find: F
PREPARED BY: SIR KIKO 23 07/31/2020