COMPOUND
INTEREST
LEARNING OUTCOMES:
At the end of the lesson, the learner is
able to compute interest, maturity value,
and present value in compound interest
environment, and solve problems
involving compound interest.
Ella and Thelma each invest P10,000 for two
years, but under different schemes. Ella’s earns
2% of P10,000 the first year, which is P200, then
another P200 the second year. Thelma earns 2%
of P10,000 the first year, which is P200, same as
Ella’s. But during the second year, she earns 2%
of the P10,000 and 2% of the P200 also. Ella
earned P10,400 and Thelma earned P10,404 after
two years. Why there is a difference?
Many bank savings accounts pay compound
interest. In this case, the interest is added to the
account at regular intervals, and the sum
becomes the new basis for computing interest.
Thus, the interest earned at a certain time interval
is automatically reinvested to yield more interest.
Maturity (Future) value and Compound Interest
Where
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term / time in years
Compound Interest
The compound interest is given by
PRESENT VALUE P AT COMPOUND INTEREST
Where
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/ time in years
Example 1: Find the maturity value and the
compound interest if P10,000 is compounded
annually at an interest rate of 2% in 5 years.
2. Find the maturity value and interest if P50,000
is invested at 5% compounded annually for 8
years.
3. Suppose your father deposited in your bank
account P10,000 at an annual interest rate of
0.5% compounded yearly when you graduate
from kindergarten and did not get the amount
until you finish Grade 12. How much will you
have in your bank account after 12 years?
Is it advisable to save all your money in an
account that earns only 0.5% interest?
Seatwork: Solve the following problems on
compound interest.
1. What are the amounts of interest and
maturity value of a loan for P20,000 at 6%
compound interest for 3 years?
2. In order to have P50,000 in 5 years, how
much should you invest if the compound
interest is 5%?
Quarter 2: Plate #2
1. How much money must be invested to obtain an
amount of P30,000 in 4 years if money earns at 8%
compounded annually?
2. A businessman invested P100,000 in a fund that pays
10.5% compounded annually for 5 years. How much
was in the fund at the end of the term?
3. What amount must be deposited by a 15-year old
student in a bank that pays 1% compounded
annually so that after 10 years he will have P20,000?