Definition of Terms

nominal rate – the specified annual rate of interest when the conversion period is other
than year, e.g. 8% compounded semiannually and 9% converted quarterly.
effective rate – the quoted annual rate of interest when the conversion period is one year.
Two rates are said to be equivalent if they produce equal amounts of interest on the same principal in
the same period of time.
frequency of conversion – the number of times the interest is added to the principal in
one year.
conversion or interest period – time between two successive computations of interest.
compound amount – total amount to which a given sum accumulates at the end of the
term.
compound interest – the difference between compound amount and original principal.

Example 1
A fund contains ₱7,500. If it earns 12%, compounded monthly, how much will be in the fund at the
end of 2 years and 6 months?
Given: P = 7500
i = j/m = 0.12/12 = 0.01
6
n = mt = 12(2 ) =30
12
Solution:
F= P(1+i)n = 7500(1+0.01)30 = ₱10,108.87
Using Logarithmic Method
F = antilog[log P + nlog(1+i)] = antilog[log 7500 + 30log(1+0.01)] = ₱10,108.87

Check Your Progress

1. Accumulate ₱6,000 for 12 years and 10 months at 10%, compounded semiannually.

2. How much will be in the bank if ₱100,000 is deposited for 20 years at 17%, compounded
monthly?
3. Find the amount due at the end of 18 years and 10 months, if ₱7,500 is invested at 9%,
compounded monthly.
4. Accumulate ₱4,000 for 7 years and 7 months at 8%, compounded quarterly

Example 2
Find the amount that should be invested today to accumulate to ₱80,000 in 5 years if money is
worth 9% compounded bi-monthly.
Given: F = 80,000
i = j/m = 0.09/24 = 0.00375
n = mt = 24(5) = 120
Solution:
P = F(1+i)-n = 80,000(1+0.00375)-120= ₱51,053.20
Using logarithmic method
P = antilog[log F – nlog(1+i)] = antilog[log 80,000 – 120log(1+0.00375) = ₱51,053.20

Check Your Progress

1. Find the present value of ₱25,000 due in 4 years if money is worth 8% compounded semi-
annually.
2. What amount should be deposited in the bank now to accumulate to ₱60,000 after 8 years if it
earns 6% compounded quarterly.
3. Discount ₱20,000 for 3 years and 5 months at8% compounded quarterly.
Finding The Rate
Example 3
At what rate compounded quarterly will ₱25,000 become ₱60,000 in 7 years?
Given: P = 25,000
F = 60,000
n = mt = 4(7) = 28
Solution:
log 𝐹−log 𝑃 log 60,000−log 25,000
i=𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( )− 1 = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( )− 1 = 0.03176068
𝑛 28
j = mi = 4(0.03176068) = 0.127042719 or 12.70%

Check Your Progress

1. Find the nominal rate, compounded quarterly, at which ₱7,500 accumulates to ₱10,500 at the
end of 4 years.
2. At what rate, converted semiannually, will ₱3,500 accumulate to ₱6,200 in 6 years and 6
months?
3. If interest is compounded quarterly, find the nominal rate at which ₱4,500 accumulates to
₱7,000 at the end of 6 years.

Finding The Time

Example 4
How long will it take ₱7,500 to amount to ₱14,200 at 10%, converted quarterly?
Given: P = 7,500
F = 14,200
i = j/m = 0.10/4 = 0.025
Solution:
log 𝐹−log 𝑃 log 14,200−log 7,500
t= = = 6.4629 𝑦𝑒𝑎𝑟𝑠
𝑚 log(1+𝑖) 4 log(1+0.025)

Check Your Progress

1. How long will it take for ₱8,000 to accumulate to ₱15,000 at 12% compounded monthly?
2. How long will it take for ₱12,000 to amount to ₱28,000 at 8% compounded semi- annually?
3. When will ₱12,000 become ₱43,000 if money is worth 9% compounded monthly?

Nominal and Effective Rates

Example 4
What nominal rate compounded quarterly is equivalent to 11.7% effective rate?
Given: w = 0.117
m=4
Solution:
1 1
j = 𝑚 [(1 + 𝑤)𝑚 − 1] = 4 [(1 + 0.117)4 − 1] = 0.1122 𝑜𝑟 11.22%

Example 5
Find the effective rate equivalent to 15% nominal rate compounded monthly.
Given: j = 0.15
m = 12
Solution:
𝑗 𝑚 0.15 12
w = (1 + ) − 1 = (1 + ) − 1 = 0.1608 𝑜𝑟 16.08%
𝑚 12
 Check Your Progress

1. What is the effective rate of 9 ½ % compounded bi-monthly?

2. Find the nominal rate compounded semi-annually equivalent to 9% effective rate.

Continuous Compounding
Example 5
Find the effective rate that is equivalent to a nominal rate of 8% compounded continuously?
Given: j = 0.08
Solution:
w = ej – 1 = e0.08-1= 0.0833 or 8.33%

Check Your Progress

1. Find the effective rate that is equivalent to a nominal rate of 11.5% compounded continuously.
2. Find the effective rate that is equivalent to a nominal rate of 9 ¾ % compounded continuously.

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TRY TO SOLVE THE FOLLOWING PROLEMS
1. When Hyzel was 10, her father deposited ₱20,000 in her account at 6% compounded monthly. How old is she
when the deposit amounted to ₱300,000?
2. Will ₱5,000 accumulate more in 20 years at 5% simple interest or at 4%, compounded semiannually?
3. Which is better: 9% compounded quarterly, or 8.8% compounded monthly? By how much?
4. How long will it take money to double itself at 8%, compounded quarterly?
5. Find the accumulated value at the end of 8 years of ₱6,000 if it earns an interest of 5%
compounded quarterly for the first 3 years and 8% compounded monthly in the remaining years.