Chapter 11

Compound Interest
Amount (S):

𝑺 = 𝑷(𝟏 + 𝒊)𝒏
Where:
▪ 𝑺: Amount to be received from investing P in a bank with interest rate 𝑖 and
n period of time.
▪ 𝑷: The Principal or the Present value.
▪ 𝒊: the compound interest rate.
▪ 𝒏: time interval.
Conversions:
Compound 𝒊 𝒏
Annually − −
Semi-annually 𝑖/2 𝑛∗2
Quarterly 𝑖/4 𝑛∗4
Monthly 𝑖/12 𝑛 ∗ 12
Every 4 months 𝑖/3 𝑛∗3
Daily 𝑖/360 𝑛 ∗ 360
To find p:
𝒔
𝒑=
(𝟏 + 𝒊)𝒏
To find i:
𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆
= (1 + 𝑖)𝑛
𝑃
𝑆 1 1
( )𝑛 = (1 + 𝑖)𝑛∗𝑛
𝑃
𝑆 1
( )𝑛 = (1 + 𝑖)
𝑃

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 𝑺 𝟏
𝒊 = ( )𝒏 − 𝟏
𝑷
To find n:
𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆
= (1 + 𝑖)𝑛
𝑃
𝑆
𝐿𝑜𝑔 ( ) = 𝑛 𝑙𝑜𝑔(1 + 𝑖)
𝑃
𝑺
𝐥𝐨𝐠 ( )
𝒏= 𝑷
𝐥𝐨𝐠(𝟏 + 𝒊)

Exercises:
(1) What is the amount of $6000 at 8% for 8 years converted annually?
Solution:
𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆 = 6000(1 + 0.08)8 = $11105.58

(2) What is the present value for an amount of $5000 for 5 years at 10%
rate converted semi-annually?
Solution:
𝑠
𝑝=
(1 + 𝑖)𝑛
5000
𝑝= = $30695.66
(1 + 0.05)10
(3) Find the amount and compound interest if 240,000 is borrowed for 5
years at 12% converted monthly
Solution:
𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆 = 240,000(1 + 0.01)60 = $436,007.2
Compound interest = S-P =436,007.2-240,000=$196007.2

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(4) On the day Aya was born her father invested $10,000 at 6% compounded
semi annually in a bank. Find the value Aya is to receive on her 21 st
birthday
Solution:

𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆 = 10,000(1 + 0.03)42 = $34,606.96

(5) What is the quarterly rate for a principal of $1000 and an amount
$1294.605 for 1.5 years converted quarterly?
Solution:
𝑆 1
𝑖 = ( )𝑛 − 1
𝑃
1
𝑖 1294.605 6
=( ) − 1 = 0.04395
4 1000
𝑖 = 0.04395 ∗ 4 = 0.17.58 ∗ 100 = 17.58%
(6) How long does it take $350 to amount $500 at 5.75% converted
annually?
Solution:
𝑆
log ( )
𝑛= 𝑃
log(1 + 𝑖)

500
log ( )
𝑛= 350 = 6.37 𝑦𝑒𝑎𝑟𝑠
log(1 + 0.0575)
(7) What is the annual rate of interest of $100,000 to accumulate $600,000
in 5 years?
Solution:
𝑆 1
𝑖 = ( )𝑛 − 1
𝑃

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 600000 1
𝑖=( )5 − 1 = 0.43 ∗ 100 = 43%
100000
(8) What is the present value for an amount of $12000 at 9% rate converted
quarterly for 1.5 years?
Solution:
𝑠
𝑝=
(1 + 𝑖)𝑛
12000
𝑝= = $10500.3
(1 + 0.0225)6

(9) What is the amount for a principal of $10,000 at 12% rate converted
semi-annually for 2 years?
Solution:
𝑆 = 𝑃(1 + 𝑖)𝑛
𝑆 = 10000(1 + 0.06)4 = 12624.76
(10) A man wants to leave $100000 for his sons in a bank that gives
18% compounded monthly to receive an equal value when they reach
age 21 years old. If they are 6 and 12 years old now. How much each
will receive hence?
Solution:
Children: 𝑓𝑖𝑟𝑠𝑡: 21 − 6 = 15 ∗ 12 = 180
𝑠𝑒𝑐𝑜𝑛𝑑: 21 − 12 = 9 ∗ 12 = 108
18%
𝑖= = 1.5%
12
𝑥 𝑥
+ = 100,000
(1 + 0.015)180 (1 + 0.015)108
𝑥 𝑥
+ = 100,000
14.584 4.993
0.0686𝑥 + 0.200𝑥 = 100,000
0.26885𝑥 = 100,000
𝑥 = $371,954.6

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 (11) A man died suddenly, and he has three children when he died
Ahmed 13 years old, Omar 15 years old and Farida 10 years old, the man
leaves $200000 when he died to be distributed on the three children when
they Reach age of 21 years old “the boy will receive twice the girl” with
12% converted Annually. How much each will receive hence?
Solution:
Children:
𝐴ℎ𝑚𝑒𝑑: 21 − 13 = 8
𝑂𝑚𝑎𝑟: 21 − 15 = 6
𝐹𝑎𝑟𝑖𝑑𝑎: 21 − 10 = 11

𝑖 = 12%
2𝑥(1 + 0.12)−8 + 2𝑥(1 + 0.12)−6 + 𝑥(1 + 0.12)−11 = 200000
2.10850 x=200000
𝒙 = $𝟗𝟒𝟖𝟓𝟑. 𝟗𝟒 𝑭𝒂𝒓𝒊𝒅𝒂
𝟐𝒙 = $𝟏𝟖𝟗𝟕𝟎𝟕. 𝟖𝟗 𝑨𝒉𝒎𝒆𝒅 𝒂𝒏𝒅 𝒐𝒎𝒂𝒓

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