20/04/25

CHAPTER 3:
COMPOUND INTEREST
§ Introduction to Compound Interest
§ Compound Interest Formula

Week 3: Introduction to Compound Interest CLO3

Introduction To Compound
Interest

Learning Objectives
§ Explain the concepts of time value of money.
§ Derive the compound amount formula.

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Week 3: Introduction to Compound Interest CLO3

Compound Interest
Compound interest is the interest on a deposit, or a loan calculated based on both the
initial principal and all of the accumulated interest from previous periods.

RM1,000 RM1,100 RM1,210 RM1,331

0 Year 1 Year 2 Year 3

10% x 1,000 = 100 10% x 1,100 = 110 10% x 1,210 = 121

Week 3: Introduction to Compound Interest CLO3

Periodic Interest Rate

Interest compounded annually

0 1 2

Interest compounded semiannually

0 0.5 1 1.5 2

Interest compounded quarterly

0 0.25 0.5 0.75 1 1.25 1.5 1.75 2

Interest compounded monthly

0 1 2

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Week 4: Compound Interest Formula CLO3

Compound Interest Formula

Learning Objective
§ Calculate the future value, compound interest and present value of
investments and loans.

Week 4: Compound Interest Formula CLO3

Future Value Formula Compound Interest Formula

𝑺𝑺 = 𝑷𝑷 𝟏𝟏 + 𝒊𝒊 𝒏𝒏 𝑛𝑛 = 𝑚𝑚 × 𝑡𝑡 𝑰𝑰 = 𝑺𝑺 − 𝑷𝑷

𝑗𝑗
𝑖𝑖 =
𝑚𝑚

where,
𝑆𝑆 represents the future value
𝑃𝑃 represents the present value or the principle
𝑖𝑖 represents the interest per period
𝑗𝑗 represents the interest rate per year
𝑚𝑚 represents the number of times interest is compounded per year
𝑡𝑡 represents the time in years.
𝑛𝑛 represents the number of times interest is compounded over the period

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Week 4: Compound Interest Formula CLO3

Example 1
Find the future value and the interest earned if RM1000 is invested for 3 years at 6%
compounded monthly.

Solution:
𝑆𝑆 = 𝑃𝑃 1 + 𝑖𝑖 !

"#
𝑃𝑃 = 𝑅𝑅𝑅𝑅𝑅,000 0.06
𝑆𝑆 = 1000 1 +
12
𝑡𝑡 = 3 years
𝑆𝑆 = RM1,196.68
𝑗𝑗 0.06
𝑖𝑖 = =
𝑚𝑚 12
𝑛𝑛 = 𝑚𝑚 × 𝑡𝑡 = 12×3 = 36
𝑆𝑆 =?
𝐼𝐼 =?

Week 4: Compound Interest Formula CLO3

Example 2
Maria needs RM48000 five years from today. If her bank pays 10% interest compounded
semi-annually, what amount must she deposited today to have RM48000?

Solution:
𝑆𝑆 = 𝑃𝑃 1 + 𝑖𝑖 !
48000 = 𝑃𝑃 1 + 0.05 $%
𝑆𝑆 = 𝑅𝑅𝑅𝑅𝑅𝑅,000
48000 = 𝑃𝑃 1.05 $%
𝑗𝑗 0.10
𝑖𝑖 = = = 0.05
𝑚𝑚 2 48000
𝑃𝑃 =
𝑡𝑡 = 5 1.05 $%
𝑛𝑛 = 𝑚𝑚 × 𝑡𝑡 = 2 × 5 = 10 𝑃𝑃 = RM29,467.84

𝑃𝑃 =?

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Week 4: Compound Interest Formula CLO3

Example 3
Ariff invested RM5,000 in an investment scheme at 6% compounded quarterly. After 𝑡𝑡
years, the investment was valued at RM8,051.62. determine the value of 𝑡𝑡.

Solution:
𝑆𝑆 = 𝑃𝑃 1 + 𝑖𝑖 !

𝑃𝑃 = RM5,000 &'
0.06
8051.62 = 5000 1 +
𝑗𝑗 0.06 4
𝑖𝑖 = = 8051.62
𝑚𝑚 4 &'
= 1.015
𝑛𝑛 = 𝑚𝑚 × 𝑡𝑡 = 4𝑡𝑡 5000
&'
𝑆𝑆 = RM8,051.62 log 1.610324 = log 1.015
log 1.610324
= 4𝑡𝑡
log 1.015
𝑡𝑡 = 32 years

Week 4: Compound Interest Formula CLO3

Example 4
At what rate compounded quarterly will RM5,000 become RM6,500 in 2 years 3 months?

Solution: 𝑆𝑆 = 𝑃𝑃 1 + 𝑖𝑖 !

(
𝑗𝑗
6,500 = 5000 1 +
𝑃𝑃 = RM5,000 4
(
𝑗𝑗 𝑗𝑗 6500 𝑗𝑗
𝑖𝑖 = = = 1+
𝑚𝑚 4 5000 4
𝑛𝑛 = 4 × 2.25 = 9 𝑗𝑗 (
1.3 = 1 +
𝑆𝑆 = RM6,500 4
! 𝑗𝑗
1.3 = 1 +
4
𝑗𝑗 = 0.1183 ×100%
𝑗𝑗 = 11.83%

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Week 4: Compound Interest Formula CLO3

Case 1 An Additional deposit/investment is made during the period

𝑃𝑃$ 𝑆𝑆$ 𝑆𝑆) Example 5

0 Additional deposit = 𝑋𝑋 Liana deposited RM4,000 into as savings account that pays
𝑡𝑡$ 𝑡𝑡)
7.2% interest compounded monthly. Four years later, he
added another RM5000 into the same account. Find the
Step 1: Calculate the future value for the first amount at the end of 10 years.
period (𝑡𝑡$)
𝑆𝑆$ = 𝑃𝑃$ 1 + 𝑖𝑖 !
𝑃𝑃$ = RM4,000 𝑆𝑆$ 𝑆𝑆)
Step 2: Find the new principle after the additional
deposit. 0 Additional deposit = RM5,000
𝑃𝑃) = 𝑆𝑆$ + 𝑋𝑋
𝑡𝑡$ = 4 years 𝑡𝑡) = 6 years
Step 3: Calculate the future value for the second 𝑛𝑛$ = 4 ×12 = 48 𝑛𝑛) = 6 ×12 = 36
period 𝑡𝑡) − 𝑡𝑡$
0.072
𝑆𝑆) = 𝑃𝑃) 1 + 𝑖𝑖 ! 𝑖𝑖 =
12

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Week 4: Compound Interest Formula CLO3

Case 1 Additional deposit/investment is made during the period

Solution: Step 3: Calculate the future value for the second

period 𝒕𝒕𝟐𝟐 .
Step 1: Calculate the future value for the first
period (𝒕𝒕𝟏𝟏 )
𝑆𝑆) = 𝑃𝑃) 1 + 𝑖𝑖 !
𝑆𝑆$ = 𝑃𝑃$ 1 + 𝑖𝑖 !
-)
0.072 &+ 0.072
𝑆𝑆$ = 4000 1 + 𝑆𝑆) = 15330.44 1 +
12 12
𝑆𝑆$ = RM5,330.44 𝑆𝑆) = RM23,583.55

Step 2: Find the new principle after the additional

deposit.
𝑃𝑃) = 𝑆𝑆$ + 𝑋𝑋
𝑃𝑃) = RM5,000 + RM5,330.44
𝑃𝑃) = RM15,330.44

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Week 4: Compound Interest Formula CLO3

Case 2 A Withrawal is made during the period

𝑃𝑃$
Example 6
𝑆𝑆$ 𝑆𝑆)
RM4,000 was deposited in a savings account. The
0 Withdrawal = 𝑋𝑋 interest rate is 4% compounded semiannually. After
𝑡𝑡$ 𝑡𝑡) seven years, RM500 was withdrawn. Find the balance in
the account two years after the withdrawal.
Step 1: Calculate the future value for the first
period (𝑡𝑡$)
!
𝑆𝑆$ = 𝑃𝑃$ 1 + 𝑖𝑖
𝑃𝑃$ = RM4,000 𝑆𝑆$ 𝑆𝑆) =?
Step 2: Find the new principle after the withdrawal. 0 Withdrawal = RM500
𝑃𝑃) = 𝑆𝑆$ − 𝑋𝑋
𝑡𝑡$ = 7 years 𝑡𝑡) = 2 years
Step 3: Calculate the future value for the second 𝑛𝑛$ = 7 × 2 = 14 𝑛𝑛) = 2 ×2 = 4
period 𝑡𝑡) . 0.04
𝑖𝑖 =
𝑆𝑆) = 𝑃𝑃) 1 + 𝑖𝑖 ! 2

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Week 4: Compound Interest Formula CLO3

Case 2 A withrawal is made during the period

Solution: Step 3: Calculate the future value for the second period 𝑡𝑡)

𝑆𝑆) = 𝑃𝑃) 1 + 𝑖𝑖 !
Step 1: Calculate the future value for the first period (𝑡𝑡$).
&
0.04
𝑆𝑆) = 4777.92 1 +
𝑆𝑆$ = 𝑃𝑃$ 1 + 𝑖𝑖 ! 2
0.04 $& 𝑆𝑆) = RM5,171.77
𝑆𝑆$ = 4000 1 +
2
𝑆𝑆$ = RM5,277.92

Step 2: Find the new principle after the withdrawal.

𝑃𝑃) = 𝑆𝑆$ − 𝑋𝑋
𝑃𝑃) = RM5,277.92 − 500
𝑃𝑃) = RM4,777.92

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Week 4: Compound Interest Formula CLO3

Case 3 The interest rate changed during the period

𝑃𝑃 𝑃𝑃" = 𝑆𝑆! 𝑆𝑆" Example 7

0 𝑡𝑡! 𝑡𝑡" RM3,000 is invested for 5 years. The interest rate is 6%
compounded every two months for the first two years
𝑖𝑖! 𝑖𝑖"
and 5% compounded annually for the rest of the
investment period. Calculate the amount at the end of
Step 1: Calculate the future value for the first the investment period.
interest rate (𝑖𝑖$)
𝑆𝑆! = 𝑃𝑃 1 + 𝑖𝑖! #

𝑃𝑃 = RM3,000 𝑃𝑃) = 𝑆𝑆$ 𝑆𝑆)

Step 2: Calculate the future value for the second
period 𝑡𝑡) − 𝑡𝑡$ using the new interest rate 0 𝑡𝑡$ = 2 𝑡𝑡) = 5

𝑆𝑆" = 𝑃𝑃" 1 + 𝑖𝑖" # 0.06 0.05

𝑖𝑖$ = 𝑖𝑖) =
6 1
𝑛𝑛$ = 2 × 6 = 12 𝑛𝑛) = 3 × 1 = 3

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Week 4: Compound Interest Formula CLO3

Case 3 The interest rate changed during the period

Solution: Step 2: Calculate the future value for the second period
𝑡𝑡) − 𝑡𝑡$ using the new interest rate.
Step 1: Calculate the future value for the first interst rate
(𝑖𝑖$)
𝑃𝑃) = 𝑆𝑆$
! 𝑃𝑃) = RM3,380.48
𝑆𝑆$ = 𝑃𝑃$ 1 + 𝑖𝑖
$)
0.06 !
𝑆𝑆$ = 3000 1 + 𝑆𝑆) = 𝑃𝑃) 1 + 𝑖𝑖)
6
"
𝑆𝑆$ = RM3,380.48 0.05
𝑆𝑆) = 3380.48 1 +
1
𝑆𝑆) = RM3,913.33

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Tutorial Compound Interest

Solution:
July2021a
Sumayyah deposited RM6,600 in an account at
4% compounded quarterly. After t years, the
amount in her account becomes RM8,380.25.
Find the value of t.

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Tutorial Compound Interest

Solution:
June2015
Five years ago, Ah Meng borrowed RM15,000
from a bank with the interest rate of r%
compounded quarterly. Find r if the amount of
the debt today is RM17,943.81.

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Tutorial Compound Interest

Solution:
March2015
Felixia deposited RM3,700 at Bank Cahaya that pays
interest k% compounded semiannually. After 3 years,
the amount accumulated was RM4,418.

a) Find the interest rate k.

b) Find the accumulated amount if she deposited the
money for 5 years.

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Tutorial Compound Interest

Solution:
September2015
John plans to invest RM725 in an account that offers
7% interest rate compounded semiannually for 4
years. Find the amount of interest earned.

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Tutorial Compound Interest

Solution:
Dec2018a
Marissa took a loan of RMY from Bank
Perpaduan at an interest rate of 6.5%
compounded every two months. After 8 years,
the amount to be paid is RM8,386.65. Find Y.

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Tutorial Compound Interest

Solution:
Dec2014
RM100 was invested at the end of every 3 months
for 5 years. After 5 years, no more deposit was
made. The interest rate is 6% compounded
quarterly.

a) Find the amount in the account at the end of 7

years.
b) If 77% of the amount in the account has been
withdrawn at the end of 7 years, find the balance
left in the account just after the withdrawal.

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Tutorial Compound Interest

Solution:
Dec2018b
Three years ago, an amount of RM3,000 was
deposited in a savings account that paid
interest at 4.5% compounded quarterly. Today,
another RM1,500 is deposited into the
account. Find the accumulated amount at the
end of eight years from the initial deposit.

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Tutorial Compound Interest

Solution:
July2021b
Aileen invested RM13,000 in an investment
scheme at an interest rate of 4% compounded
monthly. Four years later, she withdraws
RM10,000 from the account. If she decides to
continue investing for another two years, what
is the amount in her account at the end of the
investment period?

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Tutorial Compound Interest

Solution:
Feb2023a
A bank offers an interest rate of 4.2%
compounded quarterly for the first 5 years
and 5% compounded semi-annually for the
next 5 years. If a man wants to invest
RM10,000 for 10 years in that bank, find the
total amount he will receive when the
investment period ends.

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Tutorial Compound Interest

Solution:
Feb2023b
Seven years and eight months ago, Jonny
saved RM25,000 into an account with an
interest rate of 6% compounded every four
months. Today, he has withdrawn RM3,000
from the same account. Find the balance in his
account after the withdrawal.

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Tutorial Compound Interest

Solution:
July2019b
Alana deposited RMX into a saving account for
7 years. The interest rate is 3.75%
compounded every two months for the first
2.5 years and 4.15% compounded quarterly
for the rest of the period. If the accumulated
amount in the saving account at the end of 7
years is RM5,949.60 , find the value of X.

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