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Simple vs Compound Interest & Annuities Guide

The document explains the concepts of simple and compound interest, including their definitions, formulas, characteristics, and examples. It also covers annuities, detailing their types, key formulas, and comparisons between simple and compound interest. Key concepts such as future value and present value are highlighted, emphasizing the differences in growth rates and payment structures.

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hopejovie8
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3 views3 pages

Simple vs Compound Interest & Annuities Guide

The document explains the concepts of simple and compound interest, including their definitions, formulas, characteristics, and examples. It also covers annuities, detailing their types, key formulas, and comparisons between simple and compound interest. Key concepts such as future value and present value are highlighted, emphasizing the differences in growth rates and payment structures.

Uploaded by

hopejovie8
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

REVIEWER: Simple & Compound Interest, Annuities

SIMPLE INTEREST

Definition: Interest earned or paid only on the principal.

Formula:
I =PRT

Where:

 I = interest

 P = principal amount

 R = rate (in decimal)

 T = time (in years)

Maturity Value (Future Value):


A=P+ I

Characteristics:

 Increases at a constant rate → graph is a straight line.

 No “interest on interest.”

Examples:

1. ₱10,000 at 5% for 3 years →


I =10,000 ×0.05 × 3=₱ 1,500 A=₱ 10,000+ ₱ 1,500=₱ 11,500

2. ₱8,000 at 4% for 2 years → ₱640 interest.

3. ₱20,000 at 6% for 4 years → ₱4,800 interest; total ₱24,800.

COMPOUND INTEREST

Definition: Interest earned on both the principal and previously earned


interest.

Formula:
A=P¿

Where:

 A = amount/future value

 P = principal

 r = annual rate (in decimal)

 n = number of compounding periods per year

 t = time in years

Compound Interest:
CI =A−P

Characteristics:

 Grows faster over time than simple interest.

 “Interest on interest.”

 Graph is curved upward (exponential growth).

Examples:

1. ₱5,000 at 6% annually for 2 years →


A=5,000 ¿

2. ₱10,000 at 8% for 3 years →


A=10,000 ¿

COMPARISON: SIMPLE vs COMPOUND INTEREST

Feature Simple Compound

Principal Principal + accumulated


Computed on
only interest

Formula I = PRT A = P(1 + r/n)ⁿᵗ

Growth Linear Exponential

Straight
Graph Curved upward
line

Which earns
Lower Higher
more?

ANNUITIES

Definition: Series of equal payments made at regular intervals.

Two Types:

1. Simple Annuity – payment and compounding periods are the same.

o e.g., monthly payments with monthly compounding

2. General Annuity – payment and compounding periods differ.

o e.g., monthly payments, annual compounding

Other Classifications:

 Ordinary Annuity: Payments at end of each period.

 Annuity Due: Payments at beginning of each period.

Key Formulas:

 Future Value of Annuity:


FV =R ¿ ¿

 Present Value of Annuity:


PV =R 1−¿ ¿

Terms:

 R = regular payment

 i = periodic interest rate (annual rate ÷ no. of periods per year)

 n = total number of payments

Examples:

1. ₱5,000 yearly for 3 years at 5% →


FV =5,000 ¿

2. ₱10,000 yearly for 2 years at 6% →


PV =10,000 ¿

KEY CONCEPT CHECKS

 Simple Interest: Constant growth, no compounding.

 Compound Interest: Increases faster; earns on interest.

 Simple Annuity: Payment period = compounding period.

 General Annuity: Payment ≠ compounding period.

 Future Value (FV): Total amount after payments and interest.

 Present Value (PV): Equivalent value today of future payments.

 Higher rate or more periods → greater FV, smaller PV.

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