Compound Interest: P21,073.92 Is The Compound Amount of P15,000 Compounded Annually For 3 Years at 12%

COMPOUND INTEREST
The simple interest as discussed in the previous lesson is restricted mostly to loans and interest-earning
investment. The compound interest as another type of interest is used in all instances. In simple interest, it is
calculated on the principal, and the principal remains the same so we get the same amount of interest each
time period. With compound interest, the principal in each time period is different. Every time interest is paid,
it is added to the principal, and this increased amount is the principal for the next time period. This means that
you earn interest not only on the principal but on the interest of the previous time periods.
For example, what is the compound amount and compound interest of P15,000 compounded annually for 3
years at 12%
To calculate for the compound amount, work out the interest for the first period by multiplying the original
amount to the interest rate.
The original principal : 15,000

Interest for 1 year on 15,000 at 12%
(15,000) (0.12) : 1,800
Add the computed interest to the original principal. The sum will serve as the new principal at the end of the
first year
Amount at the end of the first year (new principal)

15,000 + 1,800 : 16,800
Compute the interest for the second period using the new principal times the interest rate
Interest for 2 years on 16,800 at 12%

(16,800) (0.12) : 2,016
Add the interest to the new principal. This will be the new principal at the end of the second year
Amount at the end of the second year (new principal)

16,800 + 2,016 : 18,816
Multiply the new principal to the interest rate. This will be the interest at the end of three years.
Interest at the end of 3 years

(18,806) (0.12) : 2,257.92
Add the interest at the end of three years to the new principal. It is the amount at the end of the third year
Amount at the end of the third year

18,816 + 2,257.92 : 21,073.92
P21,073.92 is the compound amount of P15,000 compounded annually for 3 years at 12%.
To calculate for the compound interest, subtract the principal from the compound amount. Thus, we have:
Compound Interest = Compound Amount – Principal

21,073.92 – 15,000 = P6,073.92
The compound interest from the problem is P6,073.92
The time between successive interest computations is called conversion period. Interest can be computed
monthly, quarterly, semi-annually, or annually. If the conversion period is:
Annually : number of conversion period (m) = 1

Semi-Annually : m=2
Quarterly : m=4
Monthly : m = 12
MATURITY VALUE
The concept of maturity value in simple interest has the same interpretation in compound interest. The formula
used to calculate the amount, however, is different. The procedure used in the computation of the compound
amount or the maturity value from the previous example is known as direct method. It is tiring and time
consuming. Using compound interest tables or the scientific calculator can make the computation easier. There
is also a formula that can be used in computing for the compound amount, that is:
F = P (1 + i)n
Where: F = compound amount or the maturity value
P = original principal
i = periodic rate ( i = j / m)
n = number of conversion period (n = mt)
j = nominal rate of interest per year
m = number of conversion period
t = time expressed in years
It can also be:
F = P (1 + j/m)mt
To compute for the compound interest (I), this formula can be used:
I=F-P
Ex: What is the compound amount and compound interest of P15,000 compounded annually for 3 years at 12%?
Using the previous example, we can calculate the maturity value using the formula:
F = P (1 + i)n
P = 15,000 t = 3 years m=1 j = 12% or 0.12
i = j / m = .12 / 1 = 0.12
n = mt = (1) (3) = 3
Substituting the given to the formula, we will have:
F = 15,000 ( 1 + 0.12)3
F = 15,000 (1.12)3
F = 15,000 (1.404928)
F = 21,073.92
Illustrative Examples:
1) Accumulate P10,000 for two years at 5% compounded semi-annualy
Given: P = 10,000 t = 2 years m=2 j = 5% or 0.05

i = j / m = 0.05 / 2 = 0.025
n = mt = (2) (2) = 4
Substitute the given to the formula:
F = P (1 + i)n
F = 10,000 (1 + 0.025)4
F = 10,000 (1.025)4
F = 10,000 (1.1038)
F = 11,038.13
The accumulated amount is P11,038.13 in two years
2) Three years ago, Bianca invested P30,000 with 5.5% interest compounded quarterly. How much is
her money now?
Given: P = 30,000 t = 3 years m=4 j = 5.5% or 0.055

i = j / m = 0.055 / 4 = 0.01375
n = mt = (4) (3) = 12
Substitute the given to the formula:
F = P (1 + i)n
F = 30,000 (1 + 0.01375)12
F = 30,000 (1.01375)12
F = 30,000 (1.1781)
F = 35,342.04
Bianca’s total money after 3 years is P35,342.04

Compound Interest: P21,073.92 Is The Compound Amount of P15,000 Compounded Annually For 3 Years at 12%

Uploaded by

Copyright:

Available Formats

Compound Interest: P21,073.92 Is The Compound Amount of P15,000 Compounded Annually For 3 Years at 12%

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Compound Interest: P21,073.92 Is The Compound Amount of P15,000 Compounded Annually For 3 Years at 12%

Uploaded by

Copyright:

Available Formats

COMPOUND INTEREST

The original principal : 15,000

Amount at the end of the first year (new principal)

Interest for 2 years on 16,800 at 12%

Amount at the end of the second year (new principal)

Interest at the end of 3 years

Amount at the end of the third year

Compound Interest = Compound Amount – Principal

The compound interest from the problem is P6,073.92

Annually : number of conversion period (m) = 1

It can also be:

Substituting the given to the formula, we will have:

1) Accumulate P10,000 for two years at 5% compounded semi-annualy

Given: P = 10,000 t = 2 years m=2 j = 5% or 0.05

Substitute the given to the formula:

The accumulated amount is P11,038.13 in two years

Given: P = 30,000 t = 3 years m=4 j = 5.5% or 0.055

Substitute the given to the formula:

Bianca’s total money after 3 years is P35,342.04

You might also like