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Simple.compound

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16 views

Simple.compound

Uploaded by

Ariannabelle lopez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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DEFINITIONS OF TERMS

 LENDER or CREDITOR - Person (or institution) who invests the


money or makes the funds available.

 BORROWER or DEBTOR - Person (or institution) who owes the


money or avails the funds from the lender.
 ORIGIN or LOAN DATE - Date on which money is received by the
borrower.
 REPAYMENT DATE or MATURITY DATE
- Date on which the money borrowed, or loan is to be completely
repaid.
 TIME or TERM - Amount of time in years the money is
borrowed or invested; length of time between
the origin and maturity dates.
 Principal (P) - Amount of money borrowed or invested on the
origin date.
 Rate (r) - Annual rate, usually in percent, charged by the
lender, or rate of increase of the investment
 Interest (I) - Amount paid or earned for the use of money.

 SIMPLE INTEREST ()
- Interest that is computed on the principal and then
added to it.
 MATURITY VALUE or FUTURE VALUE (𝑭)
- Amount after t years that the lender receives from the
borrower on the maturity date.
ANNUAL SIMPLE
INTEREST

Where;
EXAMPLE 1: A bank offers 0.25% annual
simple interest rate for a particular deposit.
How much interest will be earned if 1 million
pesos is deposited in this savings account for 1
year?
Given: Find
P = 1,000,000 𝐼 𝑠 = 𝑃𝑟𝑡
r = 0.25%
t = 1 year 𝐼 𝑠 =(1,000,000) (0.0025)(1)
𝐼 𝑠 =2,500
EXAMPLE 2: How much interest is charged
when P50,000 is borrowed for 9 months at
annual
Given:interest rate of 10% .
P = 50,000 r = ≈ 0.10 t = ≈ 0.75 𝑦𝑒𝑎𝑟
10%
Find
NOTE: When the
𝐼 𝑠 =𝑃𝑟𝑡 term is expressed
𝐼 𝑠 =(50,000)(0.10)(0.75) in months (M), it
should be
𝐼 𝑠 =3,750 converted in years
by
FORMULA
 To find  To find  To find
Principal: Rate: time:
𝐼 𝑠 =𝑃𝑟𝑡 𝐼 𝑠 =𝑃𝑟𝑡 𝐼 𝑠 =𝑃𝑟𝑡
𝑟𝑡 𝑟𝑡 𝑝𝑡 𝑝𝑡 𝑝𝑟 𝑝𝑟

𝐼𝑠

𝑃 𝑟 𝑡
EXAMPLE 3: When invested at an annual interest rate
of 7%, the amount earned P11,200 of simple interest in
two years. How much money was originally invested?
Find
P Given r = 7%≈ 0.07
: t=

𝑷=𝟖𝟎,𝟎𝟎𝟎 = 11,200
EXAMPLE 4: If an entrepreneur applies
for a loan amounting to P500,000 in a
bank, the simple interest of which is
P157,500 for 3 years, what interest
rate is being charge?
Given: P = 500,000 t= = 157,500
Find r
MATURITY (FUTURE) VALUE
𝐹 =𝑃 + 𝐼 𝑠
𝐹 =𝑃 (1+𝑟𝑡 )
Where;
EXAMPLE 11: Find the maturity value if 1
million pesos is deposited in a bank at an
annual simple interest rate of 0.25% after 1
year?
Given: P= r= ≈ 0.0025 t=1
1,000,000 0.25% year
Solution
: METHOD 𝐹 =𝑃 + 𝐼 𝑠
1
𝐼 𝑠 =𝑃𝑟𝑡 𝐹 =𝑃 + 𝐼 𝑠
𝐼 𝑠 =(1,000,000)(0.0025)(1) 𝐹 =1,000,000+2,500
𝐼 𝑠 =2,500 𝐹=1,002,500
METHOD 𝐹 =𝑃 (1+𝑟𝑡 )
2
Given: P= r= ≈ 0.0025 t=1
1,000,000 0.25% year
𝐹 =𝑃 (1+𝑟𝑡 )
𝐹 =1,000,000 [1+ ( 0.0025 ) ( 1 ) ]
𝐹 =1,000,000 [1+ ( 0.0025 ) ]
𝐹 =1,000,000 ( 1.0025 )
𝐹 =1,002,500
COMPOUND
INTEREST
COMPOUND INTEREST
• COMPOUND INTEREST () – is an interest computed
every conversion period whose principal amount
includes the interest earned every end of the
conversion period.
• FREQUENCY OF CONVERSION (n) – number of
conversion periods in one year.
Compounded Annually n = 1
Compounded Semi-Annually n = 2
Compounded Quarterly n = 4
Compounded Monthly n = 12
Compounded Daily n = 365
MATURITY (FUTURE) VALUE AND COMPOUND INTEREST

Where;
F = Maturity (Future) Value
P = Principal
r = Interest rate
t = time/term in years
n = number of conversion period in a year

The compound interest is given by


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.
GIVEN: 𝑟 =2 %≈ 0.02 𝑡 =5 𝑛=1
To find F: To find :

𝐹 =11,040.81
EXAMPLE 2: Find the maturity value and interest
if
P 50,000 is invested at 5% compounded
annually
GIVEN: for 8 years. 𝑟 =5 %≈ 0.05 𝑡 =8 𝑛=1
To find F: To find :

𝐹 =73,872.77
PRESENT VALUE (P) AT COMPOUND INTEREST

Where;
F = Maturity (Future) Value
P = Principal
r = Interest rate
t = time/term in years
n = number of conversion period in a
year
EXAMPLE 5: Find the present value of P50,000 due in 4
years if money is invested at 12% compounded semi-
annually.
GIVEN: 𝑟 =12 %≈ 0.12 𝑡=4 𝑛=2
To find
P:
EXAMPLE 6: What is the present value of P25,000 due
in 2 years and 6 months if money is worth 10%
compounded quarterly?
GIVEN: 𝑟 =10 %≈ 0.10 ≈ 2.50 𝑛=4
To find
P:

𝑃=19,529.96
FORMULA FOR FINDING THE TIME t AT
COMPOUND INTEREST

FORMULA FOR FINDING THE RATE r AT


COMPOUND INTEREST
EXAMPLE 1: At what nominal rate compounded
semi-annually will P10,000 accumulate to
P15,000 in 10 years?
GIVEN: F=15,000𝑡 =10 𝑛=2

𝑟 =0.0410 𝑜𝑟 4.10 %
EXAMPLE 2: How long would it take for P28,500 to grow
P46,700.57 in a bank savings account if money is worth 10%
compounded quarterly.
GIVEN: F=46,700.57𝑟 =10 %
≈ 0.10 𝑛=4
EXAMPLE 3: Kian won P1,600,000 in a lottery. He invested
1/4 of it in a bank. What interest rate compounded
annually will give him a future value of P700,000 in 5
years?

GIVEN:

F=700,000
𝑡 =5
𝑛=1
𝑟 =0.1184 𝑜𝑟 11.84 %

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