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Compounding More Than Once A Year

The document defines terms related to compound interest such as nominal rate, conversion period, and frequency of conversion. It provides the formulas to calculate interest compounded m times per year and present value. Examples are given to demonstrate calculating maturity value, interest earned, and present value for various compound interest scenarios involving annual, semi-annual, quarterly, monthly, daily, and continuous compounding.

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0% found this document useful (0 votes)
85 views24 pages

Compounding More Than Once A Year

The document defines terms related to compound interest such as nominal rate, conversion period, and frequency of conversion. It provides the formulas to calculate interest compounded m times per year and present value. Examples are given to demonstrate calculating maturity value, interest earned, and present value for various compound interest scenarios involving annual, semi-annual, quarterly, monthly, daily, and continuous compounding.

Uploaded by

gachaacc335
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
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COMPOUNDING

MORE THAN
ONCE A YEAR

Rizel A. Bonghanoy
SHS-Teacher
Definition of Terms:
Conversion or interest period- time between

successive conversion of interest


Frequency of conversion(m)- number of
conversion periods in one year
Nominal rate(𝑖(𝑚))
− 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Rate(j) of interest for each conversion period
𝑖(𝑚) 𝑎𝑛𝑛𝑛𝑢𝑎𝑙𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑗= =
𝑚 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦𝑜𝑓𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛

Total number of conversion periods n n=tm=(frequency


of conversion)x (time in years)

Note on rate notation: r, 𝑖(𝑚), 𝑗

In earlier lessons, r was used to denote the interest rate.


Now that an interest rate can refer to two rates(either
nominal or rate per
conversion period), the
Symbols , 𝑖(𝑚) and j will be used instead.
One Conversion Period
𝑖(𝑚)= Nominal Rate m= frequency of j=Interest Rate per conversion
(Annual Interest Rate) Conversion period

2% compounded annually; 1 1 year


0.
𝑖(1)=0.02
2% compounded semi- 2 6months
annually; 0.
𝑖(2)=0.02
2% compounded 4 3months
quarterly; 0.
𝑖(4)=0.02
2% compounded monthly; 12 1month
𝑖(12)=0.02
2% compounded daily; 365 1day
𝑖(365)=0.02
𝑖( )
j= 𝑚
𝑚

The rate for each conversion period is

In t years, interest is compounded mt times.


Maturity/Future Value Compounding m times a year
𝒊(𝒎) 𝒎𝒕
𝑭 = 𝑷(𝟏 + )
𝒎

Where:
F=maturity (future) value
P= principal
𝑖(𝑚),= nominal rate of interest (annual rate) m=frequency
of conversion
T=term/time in years
NOTE: To be the same round off your final answer only
into
two decimals use a calculator to compute your answer.
EXAMPLE:
1.

Alex borrowed 15, 000 payable with interest that is


compounded annually at 9%. How much must she pay
after 3 years?

SOLUTION:
Given: P= 15, 000 𝑖𝑚 = 0.09
EXAMPLE:
1.

t= 3 years m=1
EXAMPLE:
1.

Alet borrowed 15, 000 payable with interest that is


compounded semi-annually at 9% How much must
she pay after 3 years?

SOLUTION: 𝑖𝑚 0 .0 9
Given: P= 15, 000 𝑚
𝑖 = 0.09 𝑗= 𝑚
= 2
= 0.045

t= 3 years m=2
EXAMPLE:
1.

Find the maturity value and interest if P10,000 is


deposited in a bank at 2% compounded quarterly for
5years.
𝑖𝑚 0 . 02
SOLUTION: 𝑗=
𝑚
=
4
= 0 .005
Given: P= 10, 000 𝑖𝑚 = 0.02

t= 5years m=4
EXAMPLE:
2. Find the maturity value and interest if P10,000 is deposited in a bank at
2% compounded monthly for 5 years.

SOLUTION:
Given: P= 10, 000
t= 5years m=12
2. Find the maturity value and interest if P10,000 is deposited in a bank at
2% compounded daily for 5 years.

SOLUTION:
Given: P= 10, 000 .
t= 5years m=365

Present Value p at compounded Interest


EXAMPLE:
𝑭
P= (𝒎)
𝒊
(𝟏+ 𝒎 )𝒎𝒕

Where:

NOTE: To be the same round off your final answer only


into
two decimals use a calculator to compute your answer.
Where:
F=maturity (future) value
P= principal
𝑖(𝑚),= nominal rate of interest (annual rate)

m=frequency of conversion T=term/time in

years
EXAMPLE:
1. Find the present value of P50,000 due in 4 years if money is invested at
12% compounded semi-annually.
𝑖𝑚
SOLUTION: 𝑖 𝑚
= 0 .1 2 𝑗= 𝑚
=
0 .1 2
2
= 0 . 06
Given: F= 50, 000

t= 4 years m=2
EXAMPLE:
1. What is the present value of P25,000 due in 2 years if money is worth 10%
compounded quarterly?

SOLUTION:
Given: F= 25, 000

t= 2 years m=4
CONTINUOUS COMPOUNDING
Continuous Compound Interest

If a principal P is invested at annual interest rate


𝑖𝑚 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠𝑙𝑦, 𝑡ℎ𝑒𝑛 𝑡ℎ𝑒
𝑎𝑚𝑜𝑢𝑛𝑡 𝐹 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡 𝑦𝑒𝑎𝑟𝑠 𝑖𝑓 𝑔𝑖𝑣𝑒𝑛 𝑏𝑦 …
EXAMPLE:
Hence, the amount 20, 000 will become 23, 944.35 if you
Invest it at 3% compounded continuously for 6 years.
1. Suppose you invested 20, 000 at 3% compounded continuously. How much
will you have from this investment after 6 years?
SOLUTION: Given: P= 20, 000 t= 6 years
QUIZ#____

(b)How much should Kaye set aside and invest in a fund earning 2%
compounded quarterly if she needs P75,000 in 15 months?

(c) Peter is planning to invest P100,000. Bank A is ofering 5%


compounded semi-annually while Bank B is ofering 4.5%
compounded monthly. If he plans to invest this amount for 5 years, in
which bank should he invest?

QUIZ#____

(d) What present value, compounded quarterly at 6%, will amount to


P59,780.91 in 3 years?
(e) How much must Angel deposit in a bank that pays 0.75%
compounded quarterly so that she will have P200,000 after 15 years?
(f) Alma invested P100,000 at 5% compounded continuously. How
much will you have from this investment after 10 years?

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