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COMPOUND INTEREST

The document discusses compound interest, explaining its calculation and significance in financial growth. It includes problem-solving scenarios involving loans and investments, illustrating how to compute interest yields and maturity values using various formulas. Additionally, it features dialogues highlighting the importance of saving and financial planning among students.

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jennahraisha.sulilap
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4 views

COMPOUND INTEREST

The document discusses compound interest, explaining its calculation and significance in financial growth. It includes problem-solving scenarios involving loans and investments, illustrating how to compute interest yields and maturity values using various formulas. Additionally, it features dialogues highlighting the importance of saving and financial planning among students.

Uploaded by

jennahraisha.sulilap
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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COMPOUND INTEREST

Compound interest () is the


interest computed on the
principal and also on the
accumulated past interest,
so compound interest is a
way to earn money because
you don’t just earn using
your original money, but
also the interest you
earned.
Problem Solving:
Due to COVID-19 pandemic Miss Dada a
female resident of Brgy.May Pagkakaisa
somewhere in Quezon Province thinks of a
business that can
provide for her needs as well as the need of
her neighbors so she can be of help even in
this trying time. Since she doesn’t have
money on hand, she decided to borrow
from a bank with a start-up capital of
₱50,000.00 at 7% interest rate
compounded annually and payable within 5
years. Compute for the interest yield.
4,287.65 65,539.80

65,539.80 4,587.79 70,127.59


Activity 1.
Your father asked you about
investment and wanted to
know the interest that will
be earned if he will invest
₱500,000.00 in a certain
bank that offers an annual
compounding interest of 8%
for 5 years.
1. Supposed that a local farmer wants
to borrow money from Landbank of the
Philippines to start the organic farming
in his one (1) hectare of agricultural
land. The farmer needs ₱ 150,000.00
as start-up capital. The bank offers
him 10% interest rate compounded
annually. Compute for the total
amount to be paid every year for 5
years. Show your answer in tabular
form.
2. A private school teacher plans to
apply for a housing loan in the Home
Mutual Development Fund or Pag-ibig.
It offers her a loan amounting to
₱1,500,000.00, considering all the
rules and regulations regarding the
policy with 6.5% interest per annum
payable within 15 years. Compare the
maturity value if interest will be paid
using simple interest and/or compound
interest compounded yearly.
Express the following as decimal:

1. 12% -
2. 10.5% -
3. 300% -
4. 812% -
Let’s Save
Janice and Jamaica are both senior high
school students. After class the two had a
conversation:
Janice: Wow, your cellphone is so cool! Is
that new?

Jamaica: Thank you! And yes, I just bought


it yesterday.

Janice: Did your mother give you money?


What will you do with your old cellphone?
Jamaica: No, I saved up my allowance to
accumulate enough money to buy this
phone. I am still using my old phone. I will
use my new phone for my social media
accounts.
Janice: How much is that?
Jamaica: It is only ₱2,300 but it is already
android so I can download different
applications like Tiktok, Snapchat and
games . Therefore, I will not be bored!
Janice: Oh! We are almost the same, I also
saved ₱2,300 (already) from my allowance
Jamaica: What (do you plan) will you buy
from your savings?

Janice: My old cellphone is still working, so I


think there is no need for me to buy a new
one. It will be better if I save this money.

Jamaica: But your money might get lost if


you will not spend it?

Janice: I saw from an advertisement in


Cooperative Bank that the minimum
amount to open an account for students is
₱2,000, and they call it Kid Savers.
Jamaica: Is there an advantage if
you put the money on the bank?

Janice: According to the


advertisement there will be 2.5%
interest in a year. I will use it in my
college education.
Questions:
1. What is the dialogue all about?
2. Do you think saving money is
important? Explain your answer.
2. Do you think it is wrong for
Jamaica to buy a new cellphone?
3. What can you say about Janice’s
attitude towards money?
4. How much will Janice save after
two years?
5. How do you value education?
In computing the simple interest and
other related components, the formula is

where:
Is = simple interest
P = principal or the amount invested or
borrowed or present value
r = simple interest rate
t = time or term in years
The formula can be manipulated to obtain the
following relationships:
The formula for finding the principal amount

The formula for finding the rate

The formula for finding the time


To find the maturity (future) value, you can
use either of the following:

or

where:
F = maturity (future) value
Is = simple interest
P = principal or the amount invested or
borrowed or present value
r = simple interest rate
t = time or term in years
Example 1: Given: 𝑃𝑃=₱18,500, 𝑟
=0.03, 𝑡 =5. Find simple interest (𝐼𝑠)

Example 2: Given: 𝑃𝑃=₱20,000,


𝐼𝑠=₱4,000, 𝑡𝑡=4 . Find the rate (𝑟)

Example 3: Given: 𝑃𝑃=₱40,000., 𝐼𝑠=


₱700, 𝑟 =7%. Find time (𝑡 ).

Example 4: Given: 𝑃𝑃=₱15,000, 𝑡 = 4


months,𝑟 =2%. Find maturity (future)
value (𝐹).
Read and analyze the situation below.
Let’s Save
Michael is planning to apply for a loan
in a Cooperative Bank, and he is
already aware of the terms and
conditions of payment for his loan.
When he is about to pass his
application form and compare his
computation with the bank’s payment
terms he notices some discrepancies.
To find the compound interest, which is
compounded annually the formula to find
the maturity value is:

where:
F = maturity (future) value
P = principal or present value
r = interest rate
t = term or time in years
Example 1: Given: P= ₱18,500,
r = 3% and compounded
annually for 3 years, find the
maturity value (F) and the
compound interest (Ic ).
Example 2: Given
F = ₱15,000, r = 2%
compounded annually
for 4 years, find the
present value (P).
Compounding More Than Once a Year
In the examples above the interest are compounded
annually, however, there are cases that interest are
compounded more than once a year so in this case
additional terms must be clarified such as:
Frequency of conversion (m) - number of conversion
period in one year
Conversion or interest period – time between successive
conversions of interest

n = mt = (frequency of conversion) 𝑥 (time in years)


Total number of conversion periods (n)

Nominal rate (𝒊𝒎) - annual rate of interest or interest rate


per year
Rate (j) of interest for each conversion period
Since the rate for each conversion period is
represented by j, then in t years, interest is
compounded mt times. Thus, the formula
of Maturity Value for interest compounding
m times a year is:

where:
F = maturity value
P = present value

j=

n = mt
Meanwhile, the formula in finding the present value
given the maturity value is:
𝑃=₱50,000.00, , 𝑚=4,
Example 3: Given

𝑡 =4, find F and Ic .

F=₱45,000.00, , 𝑚=2,
Example 4: Given

𝑡=4, find Ic .
Activity 2.1
Read each statement and answer the question
that follows.
1. If P = ₱85,500, and r = 1.25% compounded
monthly for 1 year, find the compound interest.
What is the first component that should be
computed? ____________________
What formula will be used?
_______________________
How much is the maturity value?
_____________________________
How will you find the simple interest?
______________
How much is the simple interest?
___________________________
2. If F = ₱50,000 with the rate 1.5%
compounded quarterly for 5 years find the
present value and compound interest
Which should be find first present value or
compound interest? __________________________
How are you going to express the rate in
decimal? ___________________
What formula will you use in finding the present
value? ____________
How much is the present value?
_________________________
How will you find the compound interest?
_________________
How much is the compound interest?
______________________________
Activity 2.2
Find the value of the required
components in each item.
1. Find the compound interest and
maturity value if P = ₱43,000, with a
rate of 5% is compounded semi-
annually for 6 years.
2. Find the compound interest and
present value if F = ₱105,000 with a
rate of 2.5% is compounded quarterly
for 3 years
For the first set of values
a. What unknown variable will you
solve first?
b. How are you going to find j?
c. What will be n?
d. How much is the maturity value?
e. How much is the compound
For the second set of values
a. What unknown variable will you
solve first?
b. How are you going to find j?
c. What will be n?
d. How much is the maturity value?
e. How much is the compound

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