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PRE-TEST
Direction: Write the letter of the correct answer on the space provided before each number.
_____ 1. Determine the simple interest to be paid by Pia Catriona if she borrowed Php 2,345.00
1
at 3 5 % for 10 months.
A. Php 134, 483.34 B. Php 143, 384.34 C. Php 144, 834.43 D. Php 148, 343.43
_____ 6. Which of the following are NOT true?
I. Principal is the money borrowed or invested on the origin data.
II. Origin date is a date on which money is paid by the borrower.
III. Interest is an amount paid or earned for the use of money.
IV. Simple interest is an interest that is computed on the principal and then
subtracted to it.
Have you done a good job? If you are not satisfied with your score,
do your best in dealing with the succeeding parts of this module. The
lessons were prepared for you to enhance your knowledge on interest.
4
Lesson 1
ILLUSTRATING SIMPLE AND COMPOUND INTEREST
Basic Concepts
Almost everyday money is borrowed and loaned in thousands of
transactions amounting, in total, to hundreds of millions of pesos. A bank is a
financial institution which is involved in borrowing and lending money. Banks
take customer deposits in return for paying customers an annual interest
payment. The bank then uses the majority of these deposits to lend to other
customers for a variety of loans.
Borrowing and lending are two sides of the same transaction. To the
lender loan represents an investment in a debt obligation. The interest charged
provides income form the investment. The rate of return on the investment is
equal to the rate of interest charged to the customer.
In view of the fact that borrowing and lending are so central to our daily
lives and in the economic system, it is essential to familiarize with the definition
of terms and learn the computation of interest in borrowing/lending
transactions.
Definition of Terms
Debtor or Maker – an individual or institution that borrows money for
any purpose
Lender –an individual or financial institution which loans the money
Interest (I) – the payment for the use of borrowed money or the amount
earned on invested money
Principal (P) – the capital or sum of money borrowed or invested
Rate of Interest (r) – this is a fractional part of the principal that is paid
on the loan or investment which is usually expressed as percent
Time (t) – the number of years for which money is borrowed or invested
Maturity Value or Future Value (F) – the sum of the principal and the
interest accumulated over a certain period
5
To illustrate the difference between simple and compound interest, and
better understand the concept of compound interest, consider the following
example.
Lovely and Lorainne have Php 1, 000.00 each. Lovely lent her money to a
friend who agreed to pay her back after 5 years with 5% simple interest.
Lorraine, on the other hand, deposited her money to a savings account and left
it there for 5 years to earn 5% compounded annually.
Guide Questions:
1. Who do you think will earn higher after 5 years?
___________________________________________________________________________________
2. How much is their money’s worth after 5 years?
___________________________________________________________________________________
___________________________________________________________________________________
The chart below shows how the simple and compound interests are
computed.
Lovely’s investment at 5% simple interest Lorainne’s investment at 5% compounded annually
Time Simple Time Compound
Maturity Value Maturity Value
(t) Interest (Is) (t) Interest (Ic)
0 =Php 1,000.00 0 0 =Php 1,000.00 0
=1,000 + 1,000 (0.05) (1) =1,000 + 1,000 (0.05) (1)
1 =1,000 + 50 1 =1,000 + 50
Php 50.00 Php 50.00
=1,050.00 =1,050.00
=1,000 + 1,000 (0.05) (2)
=1,050 + 1,050 (0.05) (1)
=1,000 + 1,000 (0.1)
2 2 =1,050 + 52.50
=1,000 + 100
Php 100.00 =1,102.50 Php 102.50
=1,100.00
=1,000 + 1,000 (0.05) (3)
=1,102.50 + 1,102.50 (0.05) (1)
=1,000 + 1,000 (0.15)
3 3 =1,102.50 + 55.13
=1,000 + 150
Php 150.00 =1,157.63 Php 157.63
=1,150.00
=1,000 + 1,000 (0.05) (4)
=1,157.63 + 1,157.63 (0.05) (1)
=1,000 + 1,000(0.2)
4 4 =1,157.63 + 57.88
=1,000 + 200
Php 200.00 =1,215.51 Php 215.51
=1,200.00
=1,000 + 1,000 (.005) (5)
=1,215.51 + 1,215.51 (0.05) (1)
=1,000 + 1,000 (0.25)
5 5 =1,215.51 + 60.78
=1,000 + 250 Php 276.29
Php 250.00 =1,276.29
=1,250.00
6
Questions:
1. How much money will Lovely have after 5 years? How much interest
she gained?
___________________________________________________________________________________
2. How much money will Lorainne have after 5 years? How much interest
she gained?
___________________________________________________________________________________
3. What have you noticed with the computation?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Think of It
With simple interest, interest stays the same as time passes. With
compound interest, interest grows as time passes because previous interest is
compounded or added to the principal to earn interest. The principal
continuously changes during the time period.
Bear in Mind
Compound interest is higher than simple interest when principal, rate and
time are the same. However, when the interest is only compounded for
one period, say 1 year, the compound interest and the simple interest are
the same.
7
8
9
How do you find the comparison? Can you distinguish now between
simple and compound interests?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
10
B. Write SI if the statement below refers to simple interest and CI if compound
interest.
_____ 1. The product of principal, rate and time.
_____ 2. It is useful for investing since it allows the fund to grow at a faster rate.
_____ 3. Most of the car loans calculated based on it.
_____ 4. Computation is very easy and easy to understand.
_____ 5. Interest is charged on the principal and the interest amount.
_____ 6. Principal and interest growth is rapid and increases at a fast pace.
_____ 7. The principal keeps on changing due to the addition of accrued interest
in the entire period.
_____ 8. The principal is constant.
_____ 9. It offers a comparatively high return to the lenders.
_____ 10. It is the interest which is a percentage of both principal and accrued
interest.
11
Lesson 2
SIMPLE INTEREST
Basic Concepts
Interest is the fee for use of money that is either borrowed, lent or loaned,
invested or saved over a period of time. Lenders ask for interest to make up for
the inconvenience of not being able to use the money during the time the money
is still with the borrower or on loan, to help make the risk of lending worth
taking in case the borrower fails to pay back on time and to help make up for
the inflation as it reduces the purchasing power of the amount borrowed.
Simple Interest (Is) is the amount paid for the borrowed money or the
amount earned for the deposited or invested money. It is calculated as a
percentage of the original amount borrowed or deposited over a period of time.
Example 3: Find the interest paid by Kathryn Nadine on Php 150, 150.00 that
3
she borrowed for three years and 9 months at 1 % simple interest.
4
Given:
Note:
P = 150, 150
3 When term is
r = 1 % or 1.75% or 0.0175
4 expressed in
9
t = 3 years and 9 months = 3 = 3.75 years month (m),
12
Find: Is convert in
𝑚
Solution: year(s) by t=12
Is = Prt
= (150,150)(0.0175)(3.75)
= (150,150)(0.065625)
= Php 9,853.59
13
Example 4: If Sahaya borrowed Php 125, 500.00 at an annual simple interest
3
rate if 7 % for 42 months, how much interest should she pay?
4
Given:
P = 125, 500
3
r=7 % 7.75% or 0.0775
4
42
t = 42 months = 3.5 years
12
Find: Is
Solution:
Is = Prt
= (125,500)(0.0775)(3.5)
= (125,500)(0.27125)
= Php 34,041.88
1. Mrs. Batungbakal gave a Php 100, 000.00 to Mrs. Macaspac at 18%. How
much was the interest after 45 days?
2. How much interest is paid after 8 months if Mr. Tom McKey borrowed P515,
515.00 at 3.25%?
3. Cory Kong deposited Php 202, 020.00 at a rural bank in Tayug paying 1.5%
per annum simple interest. How much interest will she earn after 2 years
and 6 months?
14
Finding Principal, Rate, and Time
From the equation of the simple interest Is = Prt, you can also solve for
the other variables; P, r and t. Equations for principal, rate, and time can be
formulated using the Golden Rule of Equations –
“Equality is preserved if both sides of the equation are changed the same way.”
To solve for P,
𝐼𝑠 𝑃𝑟𝑡
= <divide both sides by rt>
𝑟𝑡 𝑟𝑡
𝐼𝑠
𝑃=
𝑟𝑡
Equations for rate (r) and time (t) can be in a similar manner.
To easily remember things, use the drawn circle below. Cover the
letter to get its formula.
𝐼𝑠 𝒔𝑰
Covering P, you will have . Hence, P =
𝑟𝑡 𝒓𝒕
Is 𝐼𝑠 𝒔𝑰
Covering r, you will have . Hence, r =
𝑃𝑡 𝑷𝒕
P r t 𝐼𝑠 𝑰𝒔
Covering t, you will have . Hence, t =
𝑃𝑟 𝑷𝒓
Solution:
𝐼𝑠 3,030 3.030
P= = (0.125)(0.25) = 0.03125 = Php 96, 960.00
𝑟𝑡
Example 3: If a principal of Php 500, 005.00 earns interest of Php 50, 005.00 in
6 years and 6 months, what interest rate is in effect?
Note: Rate is
Given: usually expressed
Is = 50, 005 in percentage
P = 500, 005 form. Multiply the
6 decimal number
t = 6 years and 6 months 6 = 6.5 years
12 by 100 and attach
Find: r % symbol.
Solution:
𝐼𝑠 50,005 50,005
r= = (500,005)(6.5)= 3,250,032.5 = 0.0154 or 1.54%
𝑃𝑡
Example 5: How long will it take Php 30, 000.00 invested at 9% simple interest
to earn Php 5, 500.00?
Given:
P = 30, 000
r = 9% or 0.09
Is = 5, 500
Find: t
Solution:
𝐼𝑠 5,500 5,500
t= = (30,000)(0.09) = 2,700 = 2.04 years
𝑃𝑟
1
Example 6: How long will a principal earn an interest equal to half of it at 5
4
% simple interest?
Given:
P=P
1
r=54% 5.25% = 0.0525
1
Is = P or 0.5P
2
Find: t
Solution:
𝐼𝑠 0.5𝑃 0.5
t= = 𝑃(0.0525) = 0.0525 = 9.52 years
𝑃𝑟
Basic Concepts
When the time period of a loan reaches its maturity date, the loan is said
to mature. In that period, the borrower repays the principal and the interest.
The total repayment is known as the maturity value (or future value).
Solution:
a.) F = P (1 + rt)
= 12, 345 [(1 + (0.0215)(1.25)]
= 12, 345 (1 + 0.026875)
= 12, 345 (1.026875) 2 yrs. and 9 mos.
= Php 12, 676.77 3
= 2 4 years = 2.75
b.) F = P (1 + rt)
= 67, 890 [(1 + (0.001)(2.75)]
= 67, 890 (1 + 0.00275)
= 67, 890 (1.00275)
= Php 68, 076.70
Example 2: How much should Lyzza Mae pay for a Php 10, 000.00 loan charged
1
at 16 % at the end of 1 year and 6 months?
2
Given:
P = 10, 000
1
r = 16 % 16.5% = 0.165
2
6
t = 1 year and 6 months 1 = 1.5 years
12
Find: F
19
Solution:
F = P (1 + rt)
= (10, 000) [1+ (0.165)(1.5)]
= (10, 000)(1 + 0.2475)
= (10, 000)(1.2475)
= Php 12, 475.00
Example 3: Six years and nine months ago, Bianca borrowed Php 25, 000.00
from Bernadeth with the promise that Bianca pay Bernadeth the principal plus
5
accumulated interest at 9 % simple interest now. What amount is due?
8
Given:
P = 25, 000
5
r =9 % 9.625% = 0.09625
8
9
t = 6 years and 9 months 6 = 6.75 years
12
Find: F
Solution:
F = P (1 + rt)
= (25, 000) [1+ (0.09625)(6.75)]
= (25, 000)(1 + 0.6496875)
= (25, 000)(1.6496875)
= Php 41, 242.19
1
2. Jamaica Rimorin invested Php 100,000.00 in a bank that pay 15 % per
2
annum simple interest. How much will she have after 90 days?
20
3. Reuben’s mother borrows Php 35,000.00 to fix their car. The bank charges
5% interest for two years. What is the total amount that his mother will owe
the bank?
Let us take the following examples for you to understand the application
of the above formulas.
Example 1: Complete the table below by solving for the unknown.
F P r t
Php 12, 345.00 (a) 1.05% 51 months
Php 246, 810.00 Php 151,515.00 (b) 9 years and 9 months
3
Php3, 691, 215.00 Php 1,234,560.00 12 % (c)
20
Solution:
𝐹 12,345 12,345 12,345
a.) P = = [1+(0.0105)(4.25)] = (1+0.044625) = 1.044625
1+𝑟𝑡
21
𝐹−𝑃 246,810−151,515 95,295
b.) r = = (151,515)(9.75)
= 1,477,271.25 = 0.0645 or 6.45%
𝑃𝑡
Example 2: Marvin and Alyssa Marie want to invest now in preparation for their
daughter’s debut 10 years hence. They want to have Php 150, 000.00 when that
time comes. How much should they invest at an investment paying 15% for 5
years?
Given:
F = 150, 000
r = 15% = 0.15
t = 5 years
Find: P
Solution:
𝐹 150,000 150,000 150,000
P= = [1+(0.15)(5)] = (1+0.75) =
1+𝑟𝑡 1.75
Solution:
𝐹−𝑃 85,000−20,000 65,000
r= = (20,000)(15)
= 300,000 = 0.22 or 22%
𝑃𝑡
Example 4: How long will an investment of Php 543, 200.00 yield Php 876,
500.00 at simple interest rate of 5% annually?
22
Given:
P = 543, 200
F = 876, 500
r = 5% = 0.05
Find: t
Solution:
𝐹−𝑃 876, 500−543,200 333,300
t= = (543,200)(0.05)
= = 12. 27 years
𝑃𝑟 27,160
Example 5: At what simple interest rate will an amount of money double itself
in 10 years?
Given:
F = 2P
P=P
t = 10 years
Find: r
Solution:
𝐹−𝑃 2𝑃−𝑃 𝑃 1
r= = (𝑃)(10) = 10𝑃 = 10 = 0.1 or 10%
𝑃𝑡
2. How much must Coco Dalisay invest today in order to have Php 22, 500.00
available in 3 years if money is worth 13% simple interest?
3. Kawhi Leonard issued a check for Php 16, 800.00 to settle a loan of Php 12,
750.00 he got two years ago. How much simple interest rate was he charged?
23
4. When will Php 9, 750.00 double itself if Kyla Ashley invested it at the rate of
7% simple interest?
5. In order to have Php 460, 000.00 five years and eight months from now, how
3
much must a businessman invest today if the simple interest is 16 %?
5
6. How long will it take Php 80, 000.00 to accumulate to Php 96, 000.00 at 8%
simple interest rate?
7. At what interest rate will Php 104, 000.00 increase to Php 128, 310.00 in 2
years and 9 months?
24
Lesson 3
COMPOUND INTEREST
Basic Concepts
Compound Interest is the interest resulting from the periodic addition of
simple interest to the principal.
The formula for compound interest (Ic) is
Ic = F – P
where
Ic = compound interest
F = maturity (future) value
P = principal
The time interval between succeeding interest calculations is called the
conversion period or compounding period. The interest earned during a period
is “converted” to principal at the end of the period because the principal and
the interest are combined and treated as the new principal for the succeeding
period. The effect of converting interest to principal is that the interest earned
in a period will also earned interest in all succeeding periods. The resulting
value is called maturity (future) value and is designated by F.
The formula for maturity (future) value is –
F = P (1 + r)t
where
F = maturity (future) value
P = principal or original amount of money
r = interest rate
t = term or number of years
Example 1: Find the maturity value and compound interest on the principal Php
30, 000.00 borrowed at 4.5% compounded annually for 3 years.
Given:
P = 30,000
r = 4.5% = 0.045
t = 3 years
Find: F and Ic
25
Solution:
F = P (1 + r)t
= 30, 000 (1 + 0.045)3
= 30, 000 (1.045)3
= 30, 000 (1.141166125)
= Php 34, 234.98
Ic = F – P
= 34, 234.98 – 30, 000
= Php 4, 234.98
Example 2. How much will you have in your bank after 5 years when your
1
mother deposited Php 15, 000.00 at an annual interest rate of 1 %
4
compounded yearly?
Given:
P = 15, 000
1
r = 1 % = 1.25% = 0.0125
4
t = 5 years
Find: F
Solution:
F = P (1 + r)t
= 15, 000 (1 + 0.0125)3
= 15, 000 (1.0125)3
= 15, 000 (1.037970703)
= Php 15, 569.56
3
Example 3. Bryan Bagunas invested Php 123, 450.00 in a bank at 2 %
4
compounded annually for 69 months.
Find:
a. maturity (future) value
b. compound interest
Given:
P = 123, 450
3
r = 2 % = 2.75 % = 0.0275
4
69
t = 69 months = 5.75 years
12
Find: F and Ic
26
Solution:
F = P (1 + r)t
= 123, 450 (1 + 0.0275)5.75
= 123, 450 (1.0275)5.75
= 123, 450 (1.168814325)
= Php 144, 290.13
Ic = F – P
= 144, 290.13 – 123, 450
= Php 20, 840.13
P r t F Ic
Php 5, 790.00 1.3% 75 months a1 a2
Php 35, 790.00 .13% 7.75 years b1 b2
3
Php 135, 790.00 1 % 5 years and 6 months c1 c2
5
2. To what sum of money will Php 71, 200.00 accumulate in 2 years and 9
months at 7% compounded annually? How much is the compound interest?
3. How much must be paid on the maturity date, December 27, 2019, on a loan
1
of Php 45, 000.00 made on June 27, 2015 with interest rate at 12 %
2
converted annually?
27
Finding the Present Value at Compound Interest
𝐹 =
𝑃 (1+𝑟)𝑡
<divide both sides by (1 + r)t >
(1+𝑟)𝑡 (1+𝑟)𝑡
Example 1: Find the present value of Php 34, 500.00 due in 3 years and 3
months if money is worth 3.45% compounded annually?
Given:
F = 34, 500
3
t = 3 years and 3 months 3 = 3.25 years
12
r = 3.45% or 0.0345
Find: P
Solution:
𝐹
P=
(1+𝑟)𝑡
34,500
=
(1+0.0345)3.25
34,500
=
(1.0345)3.25
34,500
=
1.116539544
= Php 30, 899.04
Example 2: How much should Manisan place in a time deposit in a bank that pay
2.15% compounded annually so that she will have Php 876, 500.00 after 81
months?
28
Given:
r = 2.15% or 0.0215
F = 876, 500
81
t = 81 months = 6.75 years
12
Find: P
Solution:
𝐹
P=
(1+𝑟)𝑡
876,500
=
(1+0.0215)6.75
876,500
=
(1.0215)6.75
876,500
=
1.15440714
= Php 759, 264.19
1. How much money must be invested to obtain an amount of Php 757, 575.00
in 7 years and 6 months if money earns 5.25% compounded annually?
2. Keifer Ravena aims to have his investment grow to Php 696, 969.00 in 6 years
and 9 months. How much should he invest in an account that pays 6.9%
compounded annually?
3
3. What amount must be deposited by Ramil de Jesus in a bank that pays 6 %
5
compounded annually so that after 69 months he will have Php 909, 090.00?
29
Lesson 4
COMPOUNDING MORE THAN ONCE A YEAR
Basic Concepts
The compound frequency (or conversion frequency) is the number of
compounding that take place a year. The number of conversion periods for one
year is denoted by m, while the total number of conversion periods for the
whole investment term is denoted by n.
Compounding or conversion Number of compounding(s) or
frequency conversion(s) per year
Annually 1
Semi-annually 2
Quarterly 4
Monthly 12
Weekly 52
Daily 365
The formula for the total number of conversion periods for the whole
term is –
n = mt
where
n = total number of conversion periods for the whole term
m = number of conversion periods per year
t = time period (term) of the loan or investment
𝒊(𝒎)
j=
𝒎
where
j = rate of interest for each conversion period
i(m) = annual rate of interest
m = frequency of conversion
30
Finding the Maturity (Future) Value in Compound Interest
F = P (1 + j)n
𝑖 (𝑚) mt
F = P (1 + )
𝑚
where
F = maturity (future) value
P = principal
i = nominal rate of interest (annual rate)
(m)
m = frequency of conversion
t = term/time in years
Let us take the following examples for the application of the above
formula.
Example 1: Find the maturity value of Php 565, 565.00 invested for 2 years and
6 months at 5.25% compounded quarterly.
Given:
P = 565, 565
6
t = 2 years and 6 months 2 = 2.5 years
12
m=4
i(m) = i(4) = 5.25% or 0.0525
Find: F
Solution:
Compute for the interest rate in a conversion period
𝑖 (𝑚) 𝑖 (4) 0.0525
j= = = = 0.013125
𝑚 4 4
31
Compute for the maturity (future) value
F = P (1 + j)n
= 565, 565 (1 + 0.013125)10
= 565, 565 (1.013125)10
= 565, 565 (1.130279603)
= Php 644, 336.67
Example 2: On January 23, 2013, Julius Balagot borrowed Php 15, 000.00 and
promised to pay the principal and interest at 9% compounded semi-annually
on October 23, 2017. How much will he pay?
Given:
P = 15, 000
m=2
i = i(2) = 9% = 0.09
(m)
n = mt = (2)(4.75) = 9.5
F = P (1 + j)n
= 15, 000 (1 + 0.045)9.5
= 15, 000(1.045)9.5
= 15, 000 (1.519164346)
= Php 22, 787.47
Example 3. Find the compound amount and interest on Php 175, 250.00 for 15
3
years and 6 months at 6 % compounded quarterly.
4
Given:
P = 175, 250
m=4
3
i(m) = i(4) = 6 % = 6.75 or 0.0675
4
6
t = 15 years and 6 months 15 = 15.5 years
12
Find: F
32
Solution:
Compute first j and n before F and Ic
n = mt = (4)(15.5) = 62
F = P (1 + j)n
= 175, 250 (1 + 0.016875)62
= 175, 250(1.016875)62
= 175, 250 (2.822210202)
= Php 494, 592. 34
Ic = F – P
= 494, 592. 34 – 175, 250
= 319, 342.34
Example 4: Vice Ganda borrows Php 246, 810.00 and agrees to repay the loan
1
with interest in 15 months. If money is worth 3 % per annum compounded
5
quarterly, find:
a. total amount due in 15 months
b. compound interest for 15 months
Given:
P = 246, 810
15
t = 15 months = 1.25 years
12
1
i(m) = i(4) = 3 % = 3.2% or 0.032
5
m=4
Find: F and Ic
Solution:
Compute j and n before F and then Ic.
n = mt = (4)(1.25) = 5
33
a.) F = P (1 + j)n
= 246, 810 (1 + 0.008)5
= 246, 810(1.008)5
= 246, 810 (1.040645141)
= Php 256, 841. 63
b.) Ic = F – P
= 256, 841. 63 – 246, 810
= 10,031 .63
1
Example 5: Joenel Fernando deposited Php 1, 234, 560.00 at 4 % per annum
4
compounded monthly.
Given:
P = 1, 234, 560
1
i(m) = i(12) = 4 % = 4.25% or 0.0425
4
m = 12
Solution:
21
a.) for 21 months = 1.75 years
12
n = mt = (12)(1.75) = 21
F = P (1 + j)n
= 1, 234, 560 (1 + 0.0035)21
= 1, 234, 560 (1.0035)21
= 1, 234, 560 (1.076130433)
= Php 1, 328, 547. 59
34
b.) for 4.25 years
n = mt = (12)(4.25) = 51
F = P (1 + j)n
= 1, 234, 560 (1 + 0.0035)51
= 1, 234, 560 (1.0035)51
= 1, 234, 560 (1.19505039)
= Php 1, 475, 361. 41
9
c.) for 6 years and 9 months 6 = 6.75 years
12
n = mt = (12)(6.75) = 81
F = P (1 + j)n
= 1, 234, 560 (1 + 0.0035)81
= 1, 234, 560 (1.0035)81
= 1, 234, 560 (1.327111837)
= Php 1, 638, 399. 19
Given:
P = 8, 765
1
t = 7 years = 7.5 years
2
35
Solution:
a.) When m = 12,
n = mt = (12)(7.5) = 90
F = P (1 + j)n
= 8, 765 (1 + 0.0029)90
= 8, 765 (1.0029)90
= 8, 765 (1.297737392)
= Php 11, 374. 67
b.) When m = 4,
n = mt = (4)(7.5) = 30
F = P (1 + j)n
= 8, 765 (1 + 0.010375)30
= 8, 765 (1.010375)30
= 8, 765 (1.362943191)
= Php 11, 946. 20
c.) When m = 2,
𝑖 (𝑚) 𝑖 (2) 0.0575
j= = = = 0.02875
𝑚 2 2
n = mt = (2)(7.5) = 15
F = P (1 + j)n
= 8, 765 (1 + 0.02875)15
= 8, 765 (1.02875)15
= 8, 765 (1.529846028)
= Php 13, 409. 10
36
Enhancement Exercise 4.1
1. Find the compound amount and interest on Php 175, 250.00 for 15 years and
3
6 months at 6 % compounded quarterly.
4
2. On January 23, 2013, Julius Balagot borrowed Php 15, 000.00 and promised
to pay the principal and interest at 9% compounded semi-annually on
October 23, 2017. How much will he pay?
3. Find the maturity value of Php 565, 565.00 invested for 2 years and 6 months
at 5.25% compounded quarterly.
𝐹 =
𝑃 (1+𝑗)𝑛
<divide both sides by (1 + j)n >
(1+𝑗)𝑛 (1+𝑗)𝑛
37
Let us apply the formula with the following examples:
Example 1: Cardo and Aryana aim to accumulate Php 3, 691, 215.00 in 15 years.
Which investment will require the largest present value?
a. 5% compounded monthly
b. 5% compounded quarterly
c. 5% compounded semi-annually
Given:
P = 3, 691, 215
t = 15 years
Solution:
a. When m = 12 and i(m) = i(12) = 5% or 0.05
𝑖 (𝑚) 𝑖 (12) 0.05
j= = = = 0.0042
𝑚 12 12
n = mt = (12)(15) = 180
𝐹 3,691,215 3,691,215 3,691,215
P= = = 180 =
(1+𝑗)𝑛 (1+0.0042)180 (1.0042) 2.126371129
38
Largest
𝐹 3,691,215 3,691,215 3,691,215
P= = = = present
(1+𝑗)𝑛 (1+0.025)30 (1.025)30 2.097567579 value
Solution:
When m = 2 and i(2) = i(2) = 9% or 0.09
𝑖 (𝑚) 𝑖 (2) 0.09
j= = = = 0.045
𝑚 2 2
n = mt = (2)(5.5) = 11
𝐹 25,500 25,500 25,500
P= = = =
(1+𝑗)𝑛 (1+0.045)11 (1.045)11 1.622853046
1. Find the present value of the following if the compounded amount is Php
690, 690.00 at 6.09%;
a. compounded monthly for 6 years and 9 months.
b. compounded quarterly for 9 years and 6 months.
c. compounded semi-annually for 6 years and 6 months.
39
2. How much should Jeuz Batalla invest today to provide his only son a brand
new Toyota car worth Php 1, 234, 567.00 as a graduation gift 8.5 years from
3
now if money is worth 9 % compounded quarterly?
4
We will start with this section by deriving the formula of time period t in
the compound interest formula. Use the formula,
F = P (1 + j)n then
𝐹
= (1 +j)mt <divide both sides by P>
𝑃
𝐹
log = log (1 +j)mt <apply the logarithm on both sides>
𝑃
𝐹
log = mt log (1 +j) <let mt be the base multiplier of log (1 + i)>
𝑃
𝐹
log
𝑃
=t <divide both side by m log (1 + i)>
𝑚 log(1+𝑗)
𝐹
log
𝑃
t= <formula in finding the term of the
𝑚 log(1+𝑗)
loan/investment>
40
Example 1: How long will it take Php 7, 350.00 to amount to Php 18, 500.00, if
invested at 8% compounded monthly?
Given:
P = 7, 350
F = 18, 500
i(12) = 8% or 0.08
m = 12
Find: t
𝐹
log
𝑃
t=
𝑚 log(1+𝑗)
18,500
log
7,350
=
12 log(1+0,0067)
0.4001
=
12 log(1.0067)
0.4001
=
12 (0.0029)
0.4001
=
0.0348
= 11.5 years
Example 2: When is Php 15, 250.00 due if its present value is Php 12, 650.00
1
when money is worth 5 % compounded semi-annually?
2
Given:
P = 12, 650
F = 15, 250
1
i(2) = 5 % = 5.5% or 0.055
2
m=2
41
Find: t
𝐹
log
𝑃
t=
𝑚 log(1+𝑗)
15,250
log
12,650
=
2 log(1+0,0275)
0.0812
=
2 log(1.0275)
0.0812
=
2 (0.0118)
0.0812
=
0.0236
= 3.44 years
Example 3: Kyla Ashley borrowed Php 9, 250.00 from Alyssa Grace with the
agreement that interest is charged at 8% compounded quarterly. If the
maturity value of her loan is Php 11, 500.00 when is it due?
Given:
P = 9, 250
F = 11, 500
i(4) = 8% or 0.08
m=4
Find: t
42
𝐹
log
𝑃
t=
𝑚 log(1+𝑗)
11,500
log
9,250
=
4 log(1+0,02)
0.0946
=
4 log(1.02)
0.0946
=
4 (0.0086)
0.0946
=
0.0344
= 2.75 years
2. Mark Joshua deposits Php 100, 000.00 in a savings account that pays 13.5%
interest converted semi-annually. If he decides to withdraw his money when
it grows to Php 150, 000.00, when should he withdraw his money?
3. Misuari Refugia received a loan of Php 290, 290.00 from Elmer Bondoc with
interest at 10% converted quarterly. He promised to pay Elmer in full on the
day when Php 360, 360.00 will be due. When should Misuari pay?
43
Finding Interest Rate (r)
In this section, we will derive the formula of nominal rate (i) in the
compound interest formula.
𝑖 (𝑚) mt 𝑖 (𝑚)
F = P (1 + ) <replace j by and n by mt>
𝑚 𝑚
mt
𝐹 𝑖 (𝑚)
= (1 + ) <divide both sides by P>
𝑃 𝑚
𝑚𝑡 𝐹 𝑖 (𝑚)
√ = (1 + ) <extract the mt root of both sides>
𝑃 𝑚
𝑚𝑡 𝐹 𝑖 (𝑚)
√ –1= <subtract both sides by 1>
𝑃 𝑚
𝑚𝑡 𝐹
m ( √ – 1) = i(m) <multiply both sides by m>
𝑃
𝑚𝑡 𝐹
i(m) = m ( √ – 1) <formula for compound interest rate>
𝑃
Now we can use the formula in finding the compound interest rate in
the preceding examples.
Example 1: At what interest rate will Php 2, 050.00 amount Php 3, 875.00 in 4
years and 6 months, if interest is computed semi-annually?
Given:
P = 2, 050
F = 3, 875
t = 4 years and 6 months = 4.5 years
m=2
Find: i(2)
44
Solution:
𝑚𝑡 𝐹
i(m) = m ( √ – 1)
𝑃
(2)(4.5) 3,875
i(2) = 2 ( √2,050 – 1)
9 3,875
=2( √ – 1)
2,050
= 2 (1.073307601 - 1)
= 2 (0.073307601)
= 0.1466 or 14.66%
Example 2: Joshua Dioniso, who invested Php 15, 500.00, had Php 19, 900.00
returned to him 4 years and 3 months later. At what rate of interest converted
monthly did his money earn?
Given:
P = 15, 500
F = 19, 900
t = 4 years and 3 months = 4.25 years
m = 12
Find: i(12)
Solution:
𝑚𝑡 𝐹
i(m) = m ( √ – 1)
𝑃
(12)(4.25) 19,900
i(12) = 12 ( √15,500 – 1)
51 19,900
= 12 ( √ – 1)
15,500
= 12 (1.004911625 - 1)
= 12 (0. 004911625)
= 0.0589 or 5.89%
Example 3: Roldan Andaya placed Php 34, 400.00 in an investment firm. If this
amounted to Php 42, 200.00 after 4 years and 9 months, find the rate used if it
is converted quarterly.
45
Given:
P = 34, 400
F = 42, 200
t = 4 years and 9 months = 4.75 years
m=4
Find: i(4)
Solution:
𝑚𝑡 𝐹
i(m) = m ( √ – 1)
𝑃
(4)(4.75) 42,200
i(4) = 4 ( √34,400 – 1)
19 42,200
=4( √ – 1)
34,400
= 4 (1.010814035– 1)
= 4 (0.010814035)
= 0.0433 or 4.33%
1. If Php 18, 850.00 amounts to Php 20, 500.00 in 3 years and 3 months, what
is the rate of interest compounded quarterly?
2. For a sum of Php 9, 500.00 to triple itself in 6 years and 6 months, what must
be the rate of interest compounded semi-annually?
3. On April 21, 2014 Trixie Riogelon invested Php 250, 000. If she expects to
receive Php 680, 000.00 on July 21, 2019, what interest rate compounded
monthly is used?
46
Nominal Rate (i)
Aside from periodic rate (j), the other kind of rate associated with
compound interest problems is the nominal rate.
Nominal rate is the rate quoted when interest is compounded more than
once a year. It is denoted by (i) and the number of times per year this rate is
compounded or the frequency of conversion is represented by (m).
In any investment problem, if the rate is not specified as nominal or
effective rate, it is assumed that the given rate is nominal.
To determine the nominal rate (i), if the effective rate (e) is given, we
apply the formula:
𝑚
i = m [ √(1 + 𝑒) – 1]
where
i = nominal rate
m = conversion period per year
e = effective rate
Example 1: What nominal rate compounded quarterly, will yield the effective
1
rate 3 %?
5
Given:
m=4
1
e = 3 % = 3.2% or 0.032
5
Find: i
Solution:
𝑚
i = m [ √(1 + 𝑒) – 1]
4
= 4 [√(1 + 0.032) – 1]
4
= 4 [√(1.032) – 1]
= 4 (1.0079– 1)
= 4 (0.0079)
= 0.0316 or 3.16%
47
Example 2: If interest is compounded monthly find the nominal rate if the
effective rate is 9.75%
Given:
m = 12
e = 9.75% or 0.0975
Find: i
Solution:
𝑚
i = m [ √(1 + 𝑒) – 1]
12
= 12 [ √(1 + 0.0975) – 1]
12
= 12 [ √(1.0975) – 1]
= 12 (1.0078– 1)
= 12 (0.0078)
= 0.0936 or 9.36%
2. If interest is compounded quarterly, find the nominal rate which will yield an
3
effective rate of 2 %?
4
3. When interest is compounded monthly, find the nominal rate if the effective
rate is 5.25%?
48
Effective Rate (e)
When the conversion period is one year, the quoted annual rate of
interest is known as the effective rate. To determine the effective rate (e) when
nominal rate (i) is given, we apply the formula:
𝑖
e = [(1 + )𝑚 – 1)]
𝑚
where
e = effective rate
i = nominal rate
m = conversion period per year
Note:
A. When interest is compounded annually, the effective rate is equal to
the nominal rate, but when it is compounded more than once a year, the
effective rate is higher than the nominal rate.
Find: e
Solution:
𝑖
e = [(1 + )𝑚 – 1]
𝑚
0.04 4
= [(1+ ) – 1]
4
4
= [(1 + 0.01 ) – 1]
= [(1.01)4 - 1]
= 1.04060401 – 1
= 0.0406 or 4.06%
49
Example 2: When interest is compounded monthly, find the effective rate
corresponding to the nominal rate 3.
Given:
m = 12
i = 3% or 0.03
Find: e
Solution:
𝑖
e = [(1 + )𝑚 – 1]
𝑚
0.03 12
= [(1 + ) – 1]
12
12
= [(1 + 0.0025 ) – 1]
= [(1.0025)12 - 1]
= 1.0304 – 1
= 0.0304 or 3.04%
1. What effective rate can give you the same final amount as when you place
your money at 15% compounded monthly?
2. If interest is converted quarterly, find the effective rate when the nominal
rate is 4.5%.
3. If you are to invest, which would you prefer: depositing your money at 10%
1
compounded monthly or at 10 % compounded semi-annually?
2
50
Equivalent Rates (eq)
If two rates produce equal interests on the same principal in the same
period of time, they are said to be equivalent rates (eq).
where
eq = the missing or unknown rate
c1 = conversion period of the missing rate
G = given compound interest rate
c2 = conversion period of the given rate
Solution:
𝑐
𝐺 2
eq = c1 [(1 + ) 𝑐1 – 1]
𝑐2
0.06 12
= 2 [(1 + ) 2 – 1]
12
= 2 [(1 + 0.005)6 – 1]
= 2 [(1.005)6 – 1]
= 2 (1.030377509– 1)
= 2 (0.030377509)
= 0.0608 or 6.08%
51
Example 2: Complete the table below by computing for the rates equivalent to
the following nominal rate.
(a). Given:
c1 = 2
G = 12% or 0.12
c2 = 12
Find: eq
Solution:
𝑐
𝐺 𝑐2
eq = c1 [(1 + )1– 1]
𝑐2
0.12 12
= 2 [(1 + ) 2 – 1]
12
= 2 [(1 + 0.01)6 – 1]
= 2 [(1.01)6 – 1]
= 2 (1.061520151– 1)
= 2 (0. 061520151)
= 0.123 or 12.3%
(b). Given:
c1 = 4
G = 8% or 0.08
c2 = 2
Find: eq
Solution:
𝑐
𝐺 2
eq = c1 [(1 + ) 𝑐1 – 1]
𝑐2
0.08 2
= 4 [(1 + )4 – 1]
2
1
= 4 [(1 + 0.04) – 1] 2
1
= 4 [(1.04)2 – 1]
= 4 (1.019803903– 1)
= 4 (0. 019803903)
= 0.0792 or 7.92%
52
Enhancement Exercise 4.7
3
2. What rate compounded quarterly is equivalent to 5 % compound annually?
4
[(1+𝑗)𝑛 −1]
rs =
𝑡
where
rs = missing or unknown simple interest rate
𝑖
j = = periodic rate
𝑚
n = total number of conversion periods for the whole term
t = term or time of the investment
Example 1: Find the simple interest rate equivalent to 9.6%, m=6 for 9 years
and 6 months.
Given:
i = 9.6% or 0.096
m=6
6
t = 9 years and 6 months = 9 years = 9.5 years
12
Find: rs
53
Solution:
Computer first for j and n before rs.
𝑖 0.096
j= = = 0.016
𝑚 6
n = mt = (6)(9.5) = 57
[(1+𝑗)𝑛 −1]
rs =
𝑡
[(1+0.016)57 −1]
= 9.5
[(1.016)57 −1]
= 9.5
2.471390387−1]
= 9.5
1.471390387
= 9.5
= 0.1549 or 15.49%
1
Example 2: What simple interest rate is equivalent to 5 % compounded semi-
2
1
annually , if money is invested for 5 years?
2
Given:
1
i = 5 % = 5.5% or 0.055
2
m=2
1
t = 5 years = 5.5 years
2
Find: rs
Solution:
Computer first for j and n before rs.
𝑖 0.055
j= = = 0.0275
𝑚 2
n = mt = (2)(5.5) = 11
54
[(1+𝑗)𝑛 −1]
rs = 𝑡
[(1+0.0275)11 −1]
= 5.5
[(1.0275)11 −1]
= 5.5
[(1.0275)11 −1]
= 5.5
1.347721436 − 1
= 5.5
0.347721436
= 5.5
= 0.0632 or 6.32%
1. Find the simple interest rate equivalent to 3.45%, m=2 for 4 years and 6
months.
1 1
2. If money deposited in a bank is 2 % compounded monthly for 3 years,
2 4
what simple interest rate is equivalent to it?
1
3. What simple interest rate is equivalent to 2 % compounded quarterly, if
2
1
money is invested for 5 years?
4
55
Case 3: To determine the compound interest rate equivalent to a given simple
interest rate, apply the formula
rc = m[ 𝑛√(1 + 𝑟𝑠 𝑡) – 1]
where
rc = missing or unknown compound interest rate
m = conversion period of missing rate
n = mt = number of conversion periods for the whole term
rs =given simple interest rate
t = term or time of the investment
Let us take the following examples for the application of the formula.
rc = m[ 𝑛√(1 + 𝑟𝑠 𝑡) – 1]
= 12[ 48√(1 + (0.065)(4) – 1]
= 12[ 48√(1 + 0.26) – 1]
48
= 12( √1.26 – 1)
= 12(1.004826437 - 1)
= 12(0.004826437)
= 0.0579 or 5.79%
Solution:
Compute first for n before rc.
n = mt = (2)(3.5) = 7
rc = m[ 𝑛√(1 + 𝑟𝑠 𝑡) – 1]
7
= 2[√(1 + (0.0325)(3. 5) – 1]
7
= 2[√(1 + 0.11375) – 1]
7
= 2(√1.11375 – 1)
= 2(1.015509428 - 1)
= 2(0.01550942759)
= 0.031 or 3.1%
1
Example 3: Alwean Serios plans to invest Php 100,000.00 at 12 % simple
2
interest for three years. At what compound interest m = 4 could he just as
well invest for the same period of time?
Given:
1
rs = 12 % = 12.5% or 0.125
2
t = 3 years
m=4
Find: rc
Solution:
Compute first for n before rc.
n = mt = (4)(3) = 12
rc = m[ 𝑛√(1 + 𝑟𝑠 𝑡) – 1]
= 4[ 12√(1 + (0.125)(3) – 1]
= 4[ 12√(1 + 0.375) – 1]
12
= 4( √1.375 – 1)
= 4(1.026893074 - 1)
= 4(0.026893074)
= 0.1076 or 10.76%
57
Enhancement Exercise 4.9
1. Find the rate compounded monthly equivalent to simple interest rate 3.75%
for 5.25 years.
1
2. What rate compounded quarterly is equivalent to simple interest rate 5 %
2
for 66 months?
1
3. Joshua Dionisio plans to invest Php 100, 000.00 in a bank at 12 % simple
2
interest for three years and 6 months. At what compound interest m = 2
could he just as well invest for the same period of time?
Now that you have reached the finish line of your race, I think you are
now ready to deal with the post-test of this module.
58
POST-TEST
Direction: Write the letter of the correct answer on the space provided before each number.
_____ 1. Determine the simple interest to be paid by Stephen Karl if he borrowed Php 8, 765.00
2
at 7 5 % for 8 months.
A. Php 13, 679.51 B. Php 16, 379.15 C. Php 17, 936.15 D. Php 19, 763.51
_____ 6. Which of the following are NOT true?
I. Principal is the money given or paid invested on the origin data.
II. Origin date is a date on which money is paid by the borrower.
III. Interest is an amount paid or earned for the use of money.
IV. Simple interest is an interest that is computed on the principal and then
added to it.
A. I and II B. II and III C. III and IV D. II and IV
_____ 7. Analyze the two statements below.
Statement 1: Equivalent rates refer to two annual rates with different conversion
periods that will earn the same maturity value for the same time/term.
Statement 2: Effective rate is a rate when compounded annually will give the same
compound each year with the nominal rate.
59
A. Both statements are true
B. Both statements are false
C. Statement 1 is true but statement 2 is false
D. Statement 2 is true but statement 1 is false
For numbers 8 and 9, consider the statement below.
Ion Perez is thinking of investing an amount of Php 36, 912.00 for 5.5 years at an
1
interest rate of 8 2 % compounded annually.
A. Php 178, 342.65 B. Php 176, 824.85 C. Php 174, 628.58 D. Php 172, 468.85
2
_____ 13. If money is worth 4 5 % compounded semi-annually, find the present value of Php
300, 300.00 due at the end of 3 years and 6 months.
A. Php 267, 886.69 B. Php 257, 868.96 C. Php 288, 567.96 D. Php 286, 857.69
_____14. How long will it take Php 3, 690.00 to amount to Php 8, 910.00 if invested in a bank
at 5 % compounded monthly?
A. 17.67 years B. 16.77 years C. 15.62 years D. 14.76 years
_____ 15. At what interest rate will Php 1, 010.00 amount Php 2, 020.00 in 3 years and 3
months, if interest is compounded semi-annually?
A. 25.12% B. 24.41% C. 23.31% D. 22.51%
60
_____ 16. If interest is compounded quarterly, find the nominal rate which will yield an
1
effective rate of 3 2 %.
How did you find the post-test? See page 65 of this module for key to
correction.
I hope you have done well on this part of module. I hope this module
was able to help you in enhancing your knowledge on interest.
61
Pre-Test:
1. C 6. D 11. B 16. C
2. D 7. D 12. A 17. B
3. C 8. C 13. B 18. A
4. B 9. C 14. C 19. B
5. A 10. B 15. D 20. C
B.
1. SI 6. CI
2. CI 7. CI
3. SI 8. SI
4. SI 9. CI
5. CI 10. CI
63
6. 3.74 years
7. 3.21 years
64
Enhancement Exercise 4.2
1. (a) Php 458, 360.36
(b) Php 388, 969.57
(c) Php 467, 663.16
2. Php 544, 389.39
Post-Test:
1. C 6. A 11. B 16. C
2. D 7. A 12. A 17. B
3. C 8. C 13. B 18. A
4. B 9. C 14. A 19. B
5. A 10. B 15. D 20. C
65