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Formula:
Ic = F - P
If Mrs. Yalung invested P12,900 for 4 years in
a bank that pays 3% compounded semi-
annually, how much will she receive after 4
years? How much interest will Mrs. Yalung’s
investment earn?
Required: F and Ic
Solution:
j 0.03
i = - = - = 0.015
m 2
n = tm = 4(2) = 8
Solution:
F = P ( 1 + i )n
F = P12,900 ( 1 + 0.015 )8 = P14,531.75
Ic = F - P
Ic = P14,531.75 – P12,900 = P1,631.75
Answer:
Mrs. Yalung will receive P14,531.75 after 4
years. Mrs. Yalung’s investment will earn total
interest of P1,631.75 after 4 years.
What is the compound amount of P35,000
invested at 24% interest compounded
monthly for 15 months?
P = F ( 1 + i )-n
What is the present value of P35,000 due in 7
years and 6 months if the rate is 12%
compounded quarterly?
Required: P
Solution:
j 0.12
i = - = - = 0.03
m 4
n = tm = 7.5(4) = 30
Solution:
P = F ( 1 + i )-n
P = P35,000 ( 1 + 0.03 )-30 = P14,419.54
Answer:
The present value of P35,000 that is due at
the end of 7.5 years is P14,419.54.
A certain principal P was invested at 6%
compounded semi-annually. If this principal
amounted to P94,500 at the end of 3 years,
how much was the principal?
Required: P
Solution:
j 0.06
i = - = - = 0.03
m 2
n = tm = 3(2) = 6
Solution:
P = F ( 1 + i )-n
P = P94,500 ( 1 + 0.03 )-6 = P79,142.26
Answer:
The present value of P94,500 that is due at
the end of 3 years is P79,142.26.
What is the (a) present value and (b)
compound interest earned for 3 years and 9
months of P84,500 that is compounded
quarterly at 20% interest?
j
i= - F = P ( 1 + i )n
m
1 1
F
F j 1 m
n
n
i 1 P
P
A P65,000 investment earned an interest of
P3,500 in 2 years. At what nominal rate
compounded annually was the money
invested?
Required: j = ?
Solution:
n = tm = 2(1) = 2
F = P + Ic
P65,000 + P3,500 = P68,500
Solution:
1
1
F 68500
j 1 m
n
11
2
j
P 65000
j = 0.0266 or 2.66%
Answer:
The amount P65,000 was invested at 2.66% annual interest
rate to earn a compound interest of P3,500 in 2 years.
If a certain principal is doubled in 16 years,
what is the interest rate compounded
quarterly at which it is invested?
n=tm F = P ( 1 + i )n
F F
log log
P t P
n
log( 1 i ) m log( 1 i)
How long will it take P24,000 to amount to
P53,400 if it is invested at 12% interest
converted monthly?
Required: t = ?
Solution:
j 0.12
i = - = - = 0.01
m 12
Solution:
53400
log
t 24000
6.70 years
12 log( 1 0.01)
Answer:
It will take 6.7 years to accumulate P24,000 to
P53,400 at 12% compounded monthly.
How long will it take P55,000 to accumulate
to P185,000 if it is invested at 6% interest
compounded quarterly?
I=Prt 1
m
F
j 1 m
n
j
P w 1 1
m
If present value or principal is invested for
one year at an effective rate, compound
amount F is:
FE = P ( 1 + w )
If the principal P, is invested at a nominal rate
j, compounded m times a year, the
compound amount F, obtained in t years is:
n
j
FN P1
m
t = 1 year, n = m
m
j
FN P1
m
F E = FN
m
j
P(1 w) P1
m
m
j
(1 w) 1
m
m
j
w 1 1
m
FE FN
m
j
P (1 w) P1
m
1
1
j
m m
(1 w) m
1
m
j
1
(1 w) m
1
m
j
1
(1 w) m
1 1 1
m
1
j
(1 w) m
1
m
1
j m (1 w) 1
m
Find the effective rate equivalent to a nominal
rate of 5% compounded quarterly. Apply the
effective and nominal rates determined to
find the compound amount of P5,000 for 1
year.
Required: w = ?; FE = ?; FN = ?
Answer:
The effective rate equivalent to 5% compounded
quarterly is 5.0945336914062%.
w = 0.050945336914062 or 5.0945336914062%
m2
j2 1
m
j1 m1 1 1
m2
m1
j2 m2 1 1 1
j m2
m1
What nominal rate compounded semi-
annually is equivalent to 20% compounded
quarterly?
Required: j1 = ?
Answer:
m2
j2 1
m
j1 m1 1 1
m2
4
0.20
1
2
j1 2 1
4
A nominal rate of 20.5% compounded semi-annually
is equivalent to 20% compounded quarterly.
Mrs. Yong intends to invest money in a bank.
Bank A offers 5% interest compounded semi-
annually, while Bank B offers 4.5% interest
compounded monthly. If she wants to invest
using the higher effective interest, in which
bank should she invest her money?
mA mB
jA jB
BANK A : wA 1 1 BANK B : wB 1 1
mA mB
2 12
0.05 0.045
w A 1 1 0.0506 wB 1 1 0.0459
2 12
Since Bank B’s effective rate is less than Bank A’s effective rate,
Mrs. Yong should invest her money in Bank A.
What is the nominal rate that, if compounded
monthly, is equivalent to (a) 8 ½ %
compounded semi-annually; (b) 8 ½ %
compounded quarterly; and (c) 8 ½ % effective
rate?