2. COMPOUND
INTEREST - Interest is computed on the principal and also on
the accumulated past
interests.Maturity (Future) Value and
Compound Interest
F = P(1 + r)t
where;
P = principal or present value
F = maturity (future) value at
the end of the
term
r = interest rate
t = term/time in years
The compound interest is given
Example 1:
Find the maturity value and the compound
interest if P 10,000.00 is compounded annually at
an interest rate of 2% in 5 years.
Given: P = P 10,000.00 r = 2% = 0.02
t = 5 years
Find: (a) maturity value F (b) compound
interest Ic
Solution:
(a) F = P(1 + r)t (b) Ic = F - P
F = (P 10,000.00)(1 + 0.02)5 Ic = P
11,040.80 – P 10,000.00
F = (P 10,000.00)(1.10408) Ic = P
3. Example 2:
Suppose your father deposited in your bank account P 10,000.00 at an annual
rate of 0.05% compounded yearly when you graduate from kindergarten and
get the amount until you finish Grade 12. How much will you have in your
after 12 years?
Given: P = P 10,000.00 r = 0.5% = 0.005 t = 12 years
Find: future value F
Solution:
F = P(1 + r)t
F = (P 10,000.00)(1 + 0.005)12
F = (P 10,000.00)(1.0616778
F = P 10,616.78
4. Present Value P at Compound
Interest
P = F/(1 + r)t
or
P = F(1 + r)-t
where;
P = principal or present value
F = maturity (future) value at
end of the
term
r = interest rate
t = term/time in years
Example 3:
What is the present value of P 50,000.00
due in 7 years if money is worth 10%
compounded annually?
Given: F = P 50,000.00 r = 10% =
0.1 t = 7 years
Find: present value P
Solution:
(a) P = F/(1 + r)t
P = P 50,000.00/(1 + 0.1)7
P = P 50,000.00)/1.9487171
P = P 25,657.91
5. Activity 3
Complete the table below.
Use short bond paper (encoded or
handwritten)
Support your answers with
solutions.Principal
(P)
Rate (r) Time (t) Compoun
d Interest
(Ic)
Maturity
Value (F)
P 8% 12 years (1) (2)
P
12,000.00
5.5% 6 years
9 months
(3) (4)
P
60,000.00
9.75% 10 months (5) (6)
(7) 1% 6 years (8) P
25,000.00
(9) 7.5% 4 years (10) P
