Scribd Logo
Upload

Welcome to Scribd!

  • 40 views

    Compound Interest by Using Formula

    Uploaded by

    Aysha Fida
    The document discusses compound interest formulas for different compounding periods: annually, semi-annually, quarterly. It provides examples calculating the interest earned over periods of 1-3 years on principal amounts ranging from $8000 to $160000, at annual interest rates of 5-10%. The key formulas shown are: annual compounding (A = P(1+R/100)^n); semi-annual compounding (A = P(1+R/2/100)^2n); quarterly compounding (A = P(1+R/4/100)^4n).

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Compound Interest by Using Formula

    Uploaded by

    Aysha Fida
    40 views5 pages
    The document discusses compound interest formulas for different compounding periods: annually, semi-annually, quarterly. It provides examples calculating the interest earned over periods of 1-3 years on principal amounts ranging from $8000 to $160000, at annual interest rates of 5-10%. The key formulas shown are: annual compounding (A = P(1+R/100)^n); semi-annual compounding (A = P(1+R/2/100)^2n); quarterly compounding (A = P(1+R/4/100)^4n).

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses compound interest formulas for different compounding periods: annually, semi-annually, quarterly. It provides examples calculating the interest earned over periods of 1-3 years on principal amounts ranging from $8000 to $160000, at annual interest rates of 5-10%. The key formulas shown are: annual compounding (A = P(1+R/100)^n); semi-annual compounding (A = P(1+R/2/100)^2n); quarterly compounding (A = P(1+R/4/100)^4n).

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    40 views5 pages

    Compound Interest by Using Formula

    Uploaded by

    Aysha Fida
    The document discusses compound interest formulas for different compounding periods: annually, semi-annually, quarterly. It provides examples calculating the interest earned over periods of 1-3 years on principal amounts ranging from $8000 to $160000, at annual interest rates of 5-10%. The key formulas shown are: annual compounding (A = P(1+R/100)^n); semi-annual compounding (A = P(1+R/2/100)^2n); quarterly compounding (A = P(1+R/4/100)^4n).

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 5

    Compound Interest by Using Formula, when it is calculated annually

    Case I:

    When the interest is compounded annually

    Let principal = $ P, rate = R % per annum and time = n years.

    Then, the amount A is given by the formula

    A = P (1 + R/100)ⁿ

    1. Find the amount of $ 8000 for 3 years, compounded annually at 5%


    per annum. Also, find the compound interest.

    Solution:

    Here, P = $ 8000, R = 5 % per annum and n = 3 years.

    Using the formula A = $ P(1 + R/ 100)ⁿ

    amount after 3 years = $ {8000 × (1 + 5/100)³}

    = $ (8000 × 21/20 × 21/20 × 21/20)

    = $ 9261.

    Thus, amount after 3 years = $ 9261.

    And, compound interest = $ (9261 - 8000)

    Therefore, compound interest = $ 1261.

    2. Find the compound interest on $ 6400 for 2 years, compounded


    annually at 7¹/₂ % per annum.

    Solution:

    Here, P = $ 6400, R % p. a. and n = 2 years.

    Using the formula A = P (1 + R/100)ⁿ

    Amount after 2 years = [6400 × {1 + 15/(2 × 100)}²]

    = $ (6400 × 43/40 × 43/40)

    =$ 7396.
    Thus, amount = $ 7396

    and compound interest = $ (7396 - 6400)

    Therefore, compound interest = $ 996.

    Case 2:

    When the interest is compounded annually but rates are different for different
    years

    Let principal = $ P, time = 2 years, and let the rates of interest be p % p.a. during the
    first year and q % p.a. during the second year.

    Then, amount after 2 years = $ {P × (1 + P/100) × (1 + q/100)}.

    This formula may similarly be extended for any number of years.

    1. Find the amount of $ 12000 after 2 years, compounded annually;


    the rate of interest being 5 % p.a. during the first year and 6 % p.a.
    during the second year. Also, find the compound interest.

    Solution:

    Here, P = $12000, p = 5 % p.a. and q = 6 % p.a.

    Using the formula A = {P × (1 + P/100) × (1 + q/100)}

    amount after 2 years = $ {12000 × (1 + 5/100) × (1 + 6/100)}

    = $ (12000 × 21/20 × 53/50)

    =$ 13356

    Thus, amount after 2 years = $ 13356

    And, compound interest = $ (13356 – 12000)

    Therefore, compound interest = $ 1356.

    Case 3:
    When interest is compounded annually but time is a fraction

    For example suppose time is 2³/₅ years then,

    Amount = P × (1 + R/100)² × [1 + (3/5 × R)/100]

    1. Find the compound interest on $ 31250 at 8 % per annum for 2


    years. Solution Amount after 2³/₄ years

    Solution:

    Amount after 2³/₄ years

    = $ [31250 × (1 + 8/100)² × (1 + (3/4 × 8)/100)]

    = ${31250 × (27/25)² × (53/50)}

    = $ (31250 × 27/25 × 27/25 × 53/50)

    = $ 38637.

    Therefore, Amount = $ 38637,

    Hence, compound interest = $ (38637 - 31250) = $ 7387.

    Compound Interest by Using Formula, when it is calculated half-yearly

    Interest Compounded Half-Yearly

    Let principal = $ P, rate = R% per annum, time = a years.

    Suppose that the interest is compounded half- yearly.

    Then, rate = (R/2) % per half-year, time = (2n) half-years, and

    amount = P × (1 + R/(2 × 100))²ⁿ

    Compound interest = (amount) - (principal).

    1. Find the compound interest on $ 15625 for 1¹/₂ years at 8 % per


    annum when compounded half-yearly.

    Solution:

    Here, principal = $ 15625, rate = 8 % per annum = 4% per half-year,

    time = 1¹/₂ years = 3 half-years.

    Amount = $ [15625 × (1 + 4/100)³]


    =$ (15625 × 26/25 × 26/25 × 26/25)= $ 17576.

    Compound interest = $ (17576 - 15625) = $ 1951.

    2. Find the compound interest on $ 160000 for 2 years at 10% per


    annum when compounded semi-annually.

    Solution:

    Here, principal = $ 160000, rate = 10 % per annum = 5% per half-year, time = 2


    years = 4 half-years.

    Amount = $ {160000 × (1 + 5/100)⁴}

    =$ (160000 × 21/20 × 21/20 × 21/20 × 21/20)

    compound interest = $ (194481- 160000) = $ 34481.

    Compound Interest by Using Formula, when it is calculated Quarterly

    Interest Compounded Quarterly

    Let principal = $ P. rate = R % per annum, time = n years.

    Suppose that the interest is compounded quarterly.

    Then, rate = (R/4) % Per quarter, time = (4n) quarters, and

    amount = P × (1 + R/(4 × 100))⁴ⁿ

    Compound interest = (amount) - (principal).

    1. Find the compound interest on $ 125000, if Mike took loan from a


    bank for 9 months at 8 % per annum, compounded quarterly.

    Solution:

    Here, principal = $ 125000,

    rate = 8 % per annum = (8/4) % per quarter = 2 % per quarter,

    time = 9 months = 3 quarters.

    Therefore, amount = $ {125000 × ( 1 + 2/100)³}

    =$ (125000 × 51/50 × 51/50 × 51/50)= $ 132651


    Therefore, compound interest $ (132651 - 125000) = $ 7651.

    You might also like