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INTEREST
SIMPLE INTEREST
I = Pin
(Eqn 1)
Where: I = total interest earned by the principal
P = amount of the principal
n = number of interest periods
F =P + I = P( 1 + iN)
(Eqn. 2)
Where F = the total amount to be repaid
(Eqn. 3)
(Eqn.
Example 1.
Determine the exact and ordinary simple interests
on P5,000 for the period from January 15 to June 20,
1993, if the rate of simple interest is 14%.
Example 2.
A man borrows P10,000 from a loan firm. The rate of simple
interest is 15%, but the interest is to be deducted from the
loan at the time the money is borrowed. At the end of one
year he to pay back P10,000. What is the actual rate of
interest?
Example 3.
A man borrows P6,400. from a loan association. In
repaying this debt he has to pa P400 at the end of every
3 months on the principal and a simple interest of 16%
on the principal outstanding at that time. Determine the
total amount he has paid after paying all his debt.
COMPOUND INTEREST
(Eqn. 5)
(Eqn. 7)
Principal at
the
beginning
of the
period
Interest
earned
during
period
Compound amount at
the end of period
P(1 + i)
Pi
P + Pi = P(1 + i)
P(1 + i)2
P(1 + i)i
P(1 + i)3
P(1 + i)2i
COMPOUND
n
P(1 + INTEREST
i)
P(1 + i) i
n
n-1
Effective
rate of interest = F
Present
Value
1 = (1 + i)n 1
Eqn. 10
Discount
Example 2.
At a certain interest rate compounded quarterly,
P1,000 will amount to P4,500 in 15 years. What is
the amount at the end of 10 years?
Example 3.
Compare the accumulated values at the end of 10
years if P100 is invested at the rate of 12% per year
compounded annually, semi-annually, quarterly,
monthly, daily and continuously.
Additional Problems
Example 1.
A man wishes to bequeath to his daughter P20,000 ten years
from now. What amount should he invest now if it will earn
interest of 8% compounded annually during the first 5 years
and 12% compounded quarterly during the next 5 years?
Example 2.
A company expects to retire an existing machine at the
end of 1993 and will replace it with new machine for the
same task at an estimated cost of P60,000. the old
machine is expected to be sold for P5,000 when it is
replaced. To provide for replacement, the company
intends to deposit the following amounts in an account
earning interest at 8% compounded quarterly:
P20, 000 at the end of 1900
P15, 000 at the end of 1991
P10, 000 at the end of 1992