MATH 1F

MODULE 2: COMPOUND INTEREST

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COURSE MATH 1 F: MATHEMATICS IN THE MODERN WORLD
DEVELOPER AND MARIANNE A. MENDOZA
THEIR
BACKGROUND
COURSE The course deals with nature of mathematics, appreciation of its practical,
DESCRIPTION intellectual, and aesthetic dimensions, and appreciation of mathematical
tools in daily life.

The course then proceeds to survey ways in which mathematics provides a

tool for understanding and dealing with various aspects of present day
living, such as managing personal finances, making social choices,
appreciating geometric designs, understanding codes used in data
transmission and security, and dividing limited resources fairly. These
aspects will provide opportunities for actually doing mathematics in a broad
range of exercises that bring out the various dimensions of mathematics as
a way of knowing, and test the students’ understanding and capacity. (CMO
No. 20, series of 2013)
COURSE OUTLINE I. Simple Interest
II. Bank Discount
III. Simple Interest VS Bank Discount
IV. Compound Interest
V. Present Value at Compound Interest
VI. Compound Interest for N Periods
VII. Nominal Rate and Effective Rate
VIII. Comparison of Two Rates
IX. Introduction and Basic Concept of Statistics
X. Data Collection and Presentation
XI. Frequency Distribution Table
XII. Summation Notation
XIII. Measures of Central Tendency-Ungrouped Data
XIX. Measures of Central Tendency-Grouped Data
XX. Measures of Variability-Ungrouped Data
XXI. Measures of Variability-Grouped Data
CHAPTER # II.
TITLE COMPOUND INTEREST
RATIONALE This module provides a comprehensive discussion on compound interest.
The goal of the course is for students to develop the computational skills
they will need to be successful in the world of business along with a better
understanding of business concepts and situations that require a
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 mathematical solution. Specifically, the students are expected to understand
the concepts on simple interest, simple discount and able to apply this
concepts in various business transactions in which calculation are required.
INSTRUCTION TO This module should be completed within 1 week.
THE USERS If you set an average of 1.5 hours per meeting, you should be able to
complete the module comfortably by the end of the assigned week.
Try to do all the learning activities in this module . If you do not get a
particular exercise right in the first attempt, you should not get discouraged
but instead, go back and attempt it again. If you still do not get it right after
several attempts then you should seek help from your friend, tutor or
professor.
LEARNING After going through this module, you are expected to:
OBJECTIVES  Compare and contrast simple interest with compound interest.
 Compute compound interest using simple interest formula,
compound amount formula and table factors.
 Calculate final amount if n is not exact.
 Manipulate compound amount formula
CONTENT
PREPARATORY The learners should have a good background on the following concepts
ACTIVITIES 1. Whole numbers, decimals, fractions, and percent
2. Rules in manipulating equations and formulas.
3. Fluency in calculator use is required.

SECTION1: COMPOUND INTEREST

Section Objectives:
1. Use the simple interest formula I = Prt or I = F - P to
calculate compound interest.
2. Identify interest rate per compounding period and number
of compounding periods.
3. Use the formula F = P(1 + i) n to find compound amount.
4. Use the table to find compound amount.

Compound interest essentially means "interest on the interest". The interest

that is earned when added to the principal and this new principal draws
interest, then the investment increases more quickly.

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FORMULA:

F = P(1 + i )n

Where: F = compound amount or final amount at compound interest

P = principal or present value
i = interest rate per conversion period
n = total number of conversion periods

To determine the compound interest:

FORMULA:

I = F - P

Where: I = compound interest

F = compound amount
P = principal

There are factors to consider in solving for compound interest, (1), it is a

must to know and be familiarize with the frequency of conversion period
(m). Conversion periods per year could be:

Monthly - m = 12
Quarterly - m = 4
Semi-annually - m = 2
Annually - m = 1

Another factor that we have to consider in solving compound interest is the

annual interest rate or also known as NOMINAL RATE ( j).

These factors are needed to be able to get the total number of conversion
period (n) and the interest rate per conversion period (i).

To compute for the n:

n = m x t

Where: n = total number of conversion period

m = frequency of conversion period
t = time
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To compute for the i:

j
i =
m

Where: i = interest rate per conversion period

j = nominal rate
m = frequency of conversion period

Example

1. 12% compounded annually for 3 years

SOLUTION:

Given: j = 12% m = 1 t = 3

j
i = n = m x t
m
= 1 x 3
12%
= = 3
1

= 12% = 0.12

2. 10% compounded semi-annually for 6 years

SOLUTION:

Given: j = 10% m = 2 t = 6

j
i = n = m x t
m
= 2 x 6
10 %
= = 12
2
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 = 5% = 0.05

3. 16% compounded quarterly for 2 years

SOLUTION:

Given: j = 16% m = 4 t = 2

j
i = n = m x t
m
= 4 x 2
16 %
= = 8
4

= 4% = 0.04

4. 3% compounded monthly for 5 years

SOLUTION:
Given: j = 3% m = 12 t = 5

j
i = n = m x t
m
= 12 x 5
3%
= = 60
12
1
= %
4
= 0.25% = 0.0025

5. Find the compound interest and compound amount due at the end of 3
years if 1,000 is invested at 12% compounded quarterly.

SOLUTION:

Given: P = 1,000
t = 3 years
j = 12%
m = 4
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 12%
i = = 3% = 0.03
4
n = m x t = 4 x 3 = 12

Find F and I

F = P ( 1 + i )n
= 1,000 ( 1 + 0.03 )12
= 1,425.76

I = F - P
= 1,425.76 - 1,000
= 425.76

6. Megan invested 50,000 at 10% compounded semi-annually for 5 years.

What is the amount that Megan will receive at the end of 5 years? How
much interest did she earn?

SOLUTION:

Given: P = 50,000
t = 5 years
j = 10%
m = 2
10 %
i = = 5% = 0.05
2
n = m x t = 2 x 5 = 10

Find F and I

F = P ( 1 + i )n
= 50,000 ( 1 + 0.05 )10
= 81,444.73

I = F - P
= 81,444.73 - 50,000
= 31,444.73

7. If you deposit 14,000 into an account paying 8% interest compounded

quarterly, how much money will be in the account after 3 years?

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 SOLUTION:

Given: P = 14,000
j = 8%
m = 4
t = 3 years
8%
i = = 2% = 0.02
4
n = m x t = 4 x 3 = 12

Find F

F = P ( 1 + i )n
= 14,000 ( 1 + 0.02 )12
= 17,755.39

DEVELOPMENTAL Solve the following problems.

ACTIVITIES 1. If Anne will deposit 6,500 into an account paying 8% compounded
monthly, how much money will be in her account after 7 years?
2. If you deposit 41,500 at 5% annual interest compounded quarterly, how
much money will be in the account after 10 years?
3. A principal of 12,000 is placed in a savings account at 3% compounded
annually. How much is in the account after one year, two years and three
years?
4.Accumulate 25,000 for 10 years at 6% compounded annually, semi-
annually, quarterly, monthly.
5. Find the compound amount and compound interest of 1,000,000 invested
18% compounded quarterly.
CLOSURE Watch this video to increase your understanding of the topic.
ACTIVTIES https://youtu.be/P182Abv3fOk
https://youtu.be/OQ9Mv2jwQWo
https://youtu.be/ZNM69RWZFzI

SYNTHESIS / Compound interest is one of the most important concepts to understand

GENERALIZATION when managing finances. Compound interest is interest earned on money
that was previously earned as interest. It has bigger return of investment
compared to simple interest.
EVALUATION Solve each of the following problems.
1. If 30,000 is placed in an account at 6% and is compounded quarterly for
5 years. How much is in the account at the end of 5 years?
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 2. Tony invested 800,000 compounded monthly at 12% for 5 years. Find the
compound amount and interest.
3. Interest Rate: 7.5% annually
Starting Balance: 45,400
Time Passed: 11 years
How much interest has accumulated if calculated as compound
interest?
What is the new total balance?
4. Interest Rate: 4% daily
Starting Balance: 90,500
Time Passed: 3 years
How much interest has accumulated if calculated as compound
interest?
What is the new total balance?
5. Your second mortgage is $53,000 for 8 years with an interest rate of 1%
compounded annually for 8 years. What total will you have paid after 8
years?

ASSIGNMENT / Answer this worksheet.

AGREEMENT https://0.tqn.com/z/g/math/library/Worksheets/Compound-Interest-
Worksheet-3.pdf

Section 2: Present Value and Future Value

Section Objectives:
1. Define the terms future value and present value.
2. Use table and formula to calculate present value.

Define the terms future value and present value.

Future value is the amount available at a specific date in the future. It is the
amount available after an investment has earned interest. All of the values
found in Sections 1 were future values.

In contrast, present value is the amount needed today so that the desired
future value will be available when needed. For example, an individual may
need to know the present value that must be invested today in order to have
a down payment for a new car in 3 years. Or a firm may need to know the
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 present value that must be invested today in order to have enough money
to purchase a new computer system in 20 months.

Formula for Present Value

F −n
Present Value : P= n
=F(1+i )
( 1+i )

where
P = initial investment
n = total number of compounding periods
i = interest rate per compounding period

EXAMPLE:

1. Betty Clark needs to replace two pumps at her gas station in 3 years at
an estimated cost of P 12,000. What lump sum deposited today at 5,
compounded annually must she invest to have the needed funds? How
much interest will she earn?

SOLUTION:

The interest rate is 5% (i) per compounding period for 3 compounding

periods (n)

F
P=
( 1+i )n
12000
P=
( 1+0.05 )3

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 12000
P=
1.157625
¿ 10,366.08(rounded)

I= F - P
I = 12000 - 10366.08
= 1,633.92
2. The local Harley-Davidson shop has seen business grow rapidly. The
owners plan to increase the size of their 6000-square-foot shop in one year
at a cost of P 280,000. How much should be invested in an investment
earning 6%, compounded semiannually to have the funds needed?

SOLUTION:

The interest rate per compounding period is 6%/2 = 3%, and the number of
compounding Periods is 1 year * 2 periods per year = 2

F
P=
( 1+i )n
280000
P=
( 1+0.03 )2
¿ 263,926.85(rounded)

3. Radiux Inc. wishes to partner with a Korean company to purchase a

satellite in 3 years. Radiux plans to make a cash down payment of 40, of its
anticipated P 8,000,000 cost and borrow the remaining funds from a bank.
Find the amount Radiux should invest today in an investment earning 6%,
compounded annually to have the down payment needed in 3 years.

SOLUTION:

First find the down payment to be paid in 3 years.

Down payment = .40 * P 8,000,000 = P 3,200,000
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This is the future value needed exactly 3 years from now.

F
P=
( 1+i )n
3200000
P=
( 1+0.06 )3
¿ 2,686,781.71(rounded)
Radiux must invest P 2,686,781.71 today at 6%, interest compounded
annually to have the required down payment of P 3,200,000 in 3 years.

Find Present and Future Value for n periods when n is not a whole number.

When deriving the compound interest formula, the time is assumed to be an

integer. However, when n is not a whole number and there is a fractional
part of the period, the usual practice is to allow simple interest for this
fractional part in computing the final amount. This method will be illustrated
in the following examples.

Example:

1. Find the compound amount at the end of 3 years and 5 month if P 20,000
is invested at 8% compounded semi-annually.

Solution:

The interest rate per period is 8%÷2=4% compounded semi-annually and

P=20,0000

The total time in this case is 6 whole periods ( 3 years*2=6) and 5 months
left over or fraction of a period. The compound amount at the end of 6 whole
periods is:
F = P 20000(1+0.04)6
= P 25, 306.38
The interest for the remaining 5 months, using I=PRT

I = (P 25,306.38)(0.08)(5/12)
= 843.55
Therefore, the final amount at the end of 3 years and 5 months is:
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 F = P 25,306.38 + 843.55
= P 26,149.93 (rounded)

Alternatively, this can be computed as

F = P(1+i)n(1+ RT)
F = ( 25,000)(1+0.04)6 (1 + 0.08*5/12)
= P 26, 149.93

2. Find the amount to be invested today in order to accumulate P 300,000

after 5 years and 4 months if the money will grow at 10% compounded
quarterly.

Solution:

Given a final amount of F=300,000 , i=10%÷4=2.5% and there are 21

quarters and 1 excess month within 5 years and 4 months. We are going to
add 2 more months to make the fractional part be equivalent to 1 quarter
making n=22. Compute the present value using n=22

P = F(1+i)-n
= P 300,000(1+0.025)-22
= P174, 259.40

Note that this value is lower than the true present value because of the
additional 2 months. In order to compensate for the true value of P, we are
going to compute the simple interest of the initial value of P.

I = PRT
= (P 174, 259.40)(0.10)(2/12)
= P 2904.32 (rounded)

The true present value is

P = P 174, 259.40 + P 2904.32
= P 177, 163.72 (rounded)

Nominal Rate and Effective rates.

The effective rate of interest is the equivalent annual rate of interest, which
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is compounded annually. Further, the compounding must happen more than
once every year. Let’s look at an example for better clarity:

Peter invests P 10,000 for one year at the rate of 6% per annum. The
interest is compounded semi-annually. Calculate the interest earned in the
first six months (I1).

I1 = P 10,000 x 0.06 x 6/12 = P 300. Since the interest is

compounded, the principal for the next 6 months = 10,000 + 300 =
P 10,300. Therefore, the interest earned in the next six months (I 2)
is,
I2 = 10,300 x 0.06 x 6/12 = P 309.
Hence, the total interest earned during the year I = I1 + I2 = 300 +
309 = P 609. We know the formula for interest is I = PRT … where ‘I’ is the
interest, ‘P’ is the principal amount, ‘T’ is the time period, and ‘R’ is the rate
of interest. In the case of this example, R = E or the effective rate of
interest. Therefore, we have,

I P 609
E= = =0.069=6.9 %
PT P 10,000∗1

Effective rates can also be derived using compound amount

formula.

Interest earned ∈one year

E=
Principal at the beginning of the year
F−P
E=
P
n
P(1+i ) −P
E=
P
E ¿(1+i )n−1
j m
E ¿(1+ ) −1
m
Solving the previous example using this formula, where j=6%, m=2 (semi-
annually)

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 (
E ¿ 1+
2 )
0.1 2
−1

E=1.069−1=0.069=6.09 %
DEVELOPMENTAL Solve each of the following problems.
ACTIVITIES 1. If the money is worth 24% compounded monthly, what is the present
value of 240,000 which is due at the end of 10 years and 6 months?
2. Find the present value of 30,000 for 2 years and 6 months, if money is
worth 11%, m = 2 ?
3. Accummulate 100,000 for 2 years and 10 months at 16% compounded
quarterly. How much is the interest?
4. A 50,000 loan was made on April 26, 2018 at an interest of 16%, m = 4.
What amount will be required to repay the loan due on February 14, 2019?
Find the interest.
CLOSURE Watch the following videos to increase your understanding of the topic:
ACTIVITIES
https://youtu.be/_N8rLuBFB7A
https://youtu.be/_wpThAgBQz0
https://youtu.be/EVp6mSG9fUg

SYNTHESIS / Present value is compound interest in reverse: finding the amount you
GENERALIZATION would need to invest today in order to have a specified balance in the
future.
Nominal interest rate is also defined as a stated interest rate on a loan. This
interest works according to the simple interest and does not take into
account the compounding periods.
Effective interest rate is the one which caters the compounding periods
during a payment plan.

EVALUATION Solve each of the following problems.

1. How much must a man 20 years old now deposits in a savings account
today in a bank paying 12% compounded monthly if he wants to have a
500,000 when he reaches the age of 40?
2. A man borrowed 100,000 from a money lender who charges 24% interest
compounded quarterly. If he intends to pay the accumulated amount for 5
years and 7 months from today, how much will he pay?
3. Which gives a better return, 9% compounded monthly or 9 ½% effective?
4. What effective rate is equivalent to 11% compounded quarterly?
5. Find the nominal rate, compounded quarterly which is equivalent to 8%
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 effective.
ASSIGNMENT / Reflection paper: Based from the videos you watched about the topic in
AGREEMENT Nominal rate and Effective rate. What is the importance of these two rates
in investing?
REFERENCES Mathematics of Investment 5th Edition by Asuncion C. Mercado Del Rosario,
copyright 2011, Del Ros Publishing House

Simplified Mathematics of Investment by Max B. Fafardo Jr.

Edward T. Dowling, Ph.D. c1993. Schaum’s Outline of Mathematical

Methods for Business and Economics: McGraw-Hill Companies, Inc. USA

http://intranet.siyaram.com/writereaddata/interest.pdf

understanding-interest-rates-nominal-real-and-effective.asp"
https://www.investopedia.com/articles/investing/082113/

understanding-interest-rates-nominal-real-and-effective.asp

https://www.csun.edu/~ghe59995/docs/Interpreting%20Nominal%20&%20
Effective%20Interest%20Rates.pdf

https://www.mathsisfun.com/money/compound-interest-periodic.html

https://www.accountingcoach.com/future-value-of-a-single-amount/
explanation/5

https://youtu.be/wHeDEWYNKTM
https://youtu.be/1QK81UdpMkg
https://youtu.be/_N8rLuBFB7A
https://youtu.be/_wpThAgBQz0
https://youtu.be/EVp6mSG9fUg

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