Interest is the amount of money paid for the use of borrowed capital or the
income produced by money which has been loaned.
Simple interest is calculated using principal only, ignoring any interest that had been
accrued in preceding periods.
Total Principal rate of Interest Principal
Accrued Amount interest Amount
amount rate of
interest
time time
period period
• Compound interest means “interest on top of interest”.
• In compound interest, the sum (principal + interest) will earn another interest in
the next compounding period.
• The effect of compound interest depends on how frequently it is applied.
Supposed you borrowed P1,000 that compound 10% interest annually…
1st year: 2nd year: 3rd year:
P = 1000 P = 1100 P = 1210
I = 100 I = 110 I = 121
A = 1100 A = 1210 A = 1331
Principal rate of
Amount interest
time
Final period
Amount
of Future Continuous Compounding
Value
number of time Compounding frequency(n):
the interest is
compounded in n = 1 (annually) n = 12 (monthly)
a year
n = 2 (semi-annually) n = 365 (daily)
n = 4 (quarterly)
1. Supposed you deposit Php 1, 000 in a bank savings account that compounds 8%
annually. Assume that you don’t withdraw the interest earned at the end of each period
(year), but instead let it accumulate. How much would you have at the end of three years?
Solution
Given: P = Php 1,000 A = P(1 + 𝑛𝑟 )𝑛𝑡 1st year: 2nd year:
t = 3 years 0.08 1(3)
A = 1,000(1 + ) P = 1000 P = 1080
1
r = 8% = 0.08 I = 80
A = Php 1,259.71 I = 86.4
n = 1 (annually) A = 1080 A = 1166.4
3rd year:
Required:
P = 1166.4
A=?
I = 93.31
A = 1259.71
2. An initial deposit P50,000 is made into a savings account that compounds 5% interest
annually. How much is in the account at the end of five years?
Solution
Given: P = Php 50,000 Required:
r = 5% = 0.05 A=?
n = 1 (annually)
1st year: 3rd year:
t = 5 years
P = 50,000 P = 55,125
A = P(1 + 𝑛𝑟 )𝑛𝑡 I = 2,500 I = 2,756.25
0.05 (1)(5) A = 52,500 A = 57,881.25
A = 50,000(1 + )
1
A = 50,000(1 +0.05)5 2nd year: 4th year: 5th year:
P = 52,500 P = 57,881.25 P = 60,775.31
A = Php 63,814.08
I = 2,625 I = 2,894.06 I = 3,038.77
A = 55,125 A = 60,775.31 A = 63,814.08
3. After 5 years of 4% interest compounded quarterly, an account has
P61, 019.50. What was the original deposit amount.
Solution
Given: A = Php 61,019.50 A = P(1 + 𝑛𝑟 )𝑛𝑡
r = 4% = 0.04 0.04 (4)(5)
61,019.50 = P(1 + )
n = 4 (quarterly) 4
t = 5 years 61,019.50 = P(1.01)20
Required: 61,019.50 = 1.22P
P=?
P = Php 50,015.98
4. The amount P75,000 was deposited 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.
Solution
Given: P = Php 75,000
A = P(1 + 𝑛𝑟 )𝑛𝑡
0.075 (1)(5)
r = 7.5% = 0.075 A = 75,000(1 + )
1
n = 1 (annum/annually)
t = 5 years
A = 75,000(1 +0.075)5
Required:
A = Php 107,672.20
A=?
5. What amount is accumulated after three years of P7,000 invested at the rate of
12% per year compounded semi-annually.
Solution
A = P(1 + 𝑛𝑟 )𝑛𝑡
Given: P = Php 7,000
0.12 (2)(3)
r = 12% = 0.12 A = 7,000(1 + )
2
n = 2 (semi-annually)
A = 7,000(1 +0.06)6
t = 3 years
Required: A = Php 9,929.63
A=?
6. Mark puts P30,000 in a savings account paying 10% annual interest compounded
monthly. At this rate, how much money will be in the account after 30 years?
Solution
A = P(1 + 𝑛𝑟 )𝑛𝑡
Given: P = Php 30,000
0.1 (12)(30)
r = 10% = 0.1 A = 30,000(1 + )
12
n = 12 (monthly)
A = Php 595,121.98
t = 30 years
Required:
A=?
7. Edgar wants to have P1,000,000 for retirement in 20 years. He invest in a mutual
fund paying an average of 9.5% each year compounded quarterly. How much
should he deposit into his mutual fund?
Solution
A = P(1 + 𝑛𝑟 )𝑛𝑡
Given: A = Php 1,000,000
0.095 4(20)
r = 9.5% = 0.095 1,000,000 = P(1 + )
4
n = 4 (quarterly)
1,000,000 = P(6.54)
t = 20 years
Required: P = Php 152,905.20
P=?
8. Maria wishes to turn her P10,000 investment into P100,000 in 20 years. How
much interest does she need to receive compounded annually to reach her goal?
Solution
A = P(1 + 𝑛𝑟 )𝑛𝑡
Given: P =10,000
𝑟 1(20)
A = 100,000 100,000 = 10,000(1 + )
1
n = 1 (annually) 100,000 = 10,000(1 +r)20
t = 20 years
10,000
Required:
10 = (1 +r)20
r=? 1
1
(20 )
(20) 20
10 = [(1 +r) ]
1
(20)
10 = 1 +r
1
(20)
r = 10 -1
r = 0.122 = 12.2%
9. Marie invests P50,000 into an index annuity that’s averaging 8.4% per year
compounded semi-annually. At this rate, how many years will it take for her
account to reach P1,000,000?
Solution A = P(1 + 𝑛𝑟 )𝑛𝑡
Given: P =50,000 0.084 2t
1,000,000 = 50,000(1 + )
2
A = 1,000,000
0.084 2t
n = 2 (semi-annually) 1,000,000 = 50,000(1 + )
2
r = 8.4% 50,000
2t
Required: log(20) = log(1.042)
t=? log(20) = 2t log(1.042)
2log(1.042)
log(20)
t=
2log(1.042)
t = 36.4 years
What Does It Mean to be Compounded Continuously?
• To be compounded continuously means that there is no limit to how often
interest can compound.
• Compounding continuously can occur an infinite number of times, meaning a
balance is earning interest at all times.
Does Compounded Continuously Mean Daily?
• Compounded continuously means that interest compounds every moment, at
even the smallest quantifiable period of time. Therefore, compounded
continuously occurs more frequently than daily.
10. Julie invest P50,000 in an account paying 8% interest compounded continuously.
How much money will be in her account after 25 years?
Solution
Given: P = Php 50,000 𝑟𝑡
A = Pe
r = 8% = 0.08
0.08 (25)
A = 50,000𝑒
t = 25 years
A = P𝐡𝐩 𝟑𝟔𝟗, 𝟒𝟓𝟐. 𝟖𝟎
Required:
A=?