Scribd
Upload
395 views2 pages

Simple and Compound Interest

Interest is payment made by a borrower to a lender above the repayment of the principal amount. Simple interest is calculated on the principal only, while compound interest is calculated on the principal and accumulated interest over time. The document provides formulas for calculating simple interest, compound interest compounded annually or continuously, and uses examples to demonstrate calculating future values of investments under different interest rates and compounding periods.

Uploaded by

Raymond Edge
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
395 views2 pages

Simple and Compound Interest

Interest is payment made by a borrower to a lender above the repayment of the principal amount. Simple interest is calculated on the principal only, while compound interest is calculated on the principal and accumulated interest over time. The document provides formulas for calculating simple interest, compound interest compounded annually or continuously, and uses examples to demonstrate calculating future values of investments under different interest rates and compounding periods.

Uploaded by

Raymond Edge
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Interest.

Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of


an amount above repayment of the principal sum (i.e., the amount borrowed), at a particular rate.
Simple Interest. Simple Interest is one method of computing interest. Using this method, interest is computed
from the (original) principle alone no matter how much money has accrued so far.
Three things are needed to calculate simple interest:
1. Principle = the amount put into the bank or the amount borrowed from the bank
2. Rate = the percent
3. Time = how many years the money is in the savings account at the bank or how many years it will take
you to pay back the loan.

The formula for calculating Simple Interest is:


Simple Interest = Principle x Rate x Time (in years)
SI = Prt

The formula for the end amount on a simple interest investment or loan is:
Total amount due= Principal + Simple interest earned
A= P + SI or A=P(1+rt)

The tricky part about calculating the interest is the time aspect. The time must be in years. If the time
is given in months just simply divide your months by 12
Consider an amount P called the principal invested at an interest rate r per year. Interest I is usually
paid only on the principal P after a time t, and is called simple interest calculated by I=Prt. In some instances,
interest is paid on the principal and also on the accumulated past interest known as compound interest.
Suppose a principal P is invested at an annual interest rate r compound once a year. The growths of the
principal P earning compound interest after t years are shown below:
After 1 year: A1 = P + Pr = P(1 + r)
After 2 years: A2 = A1(1 + r) = P(1 + r)(1 + r) = P(1 + r)2
After 3 years: A3 = A2(1 + r) = P(1 + r)2(1 + r) = P(1 + r)3
After t years: At = P(1 + r)t

Compound Interest Once a Year


If a principal p is invested at annual interest rate r compounded once a year, then the amount at the
end of t years is given by:
A = P(1 + r)t

Compound Interest n times a year


If a principal P is invested at annual interest rate r compounded n times a year, then the amount A
at the end of t years is given by:
nt
r
A=P 1+( ) n
Example:
Suppose you invest ₱10,000 at 10% compounded quarterly. How much will you have from this investment after
4 years?
Solution:
For investment with interest compounded quarterly, interest is compounded 3 times a year, and hence, n = 4.
Use the compounded interest formula by substituting n = 4, P=10,000, r=0.10 and t=3.
nt ( 4 ) (3 )
r 0.10
A=P 1+( ) n (
=10,000 1+
4 ) 12
=10,000 ( 1.025 ) =13,448.89
Thus you will get ₱13,448.89 after 3 years if you invest ₱10,000 at 10% compounded quarterly.

Suppose that compounding is done continuously like every hour, every minute or even a fraction of a
second. If you let the number of compounding n to increase without bound, this approaches what is called
continuous compounding.

Continuous Compound Interest


If a principal P is invested at annual interest rate r compounded continuously, then the amount A at
the end is given by A=Pert
(Note: e= Euler's number. The first few digits are: 2.7182818284590452353602874713527…..)
Simple and Compound Interest Worksheet
Test I. Complete the chart below for each interest situation: (round off answers to two decimal places if
necessary)
1) Your ₱540 gets 5.6% compounded continuously for 1.5 years.
2) You invest ₱55,000 at 8% compounded quarterly for 2.6 years.
2
3) You borrowed ₱59,000 for 2 years at 5% which was compounded daily.
3
4) You invest ₱190,000 at 4% and it’s compounded semi annually for 3½ years.
5) Your ₱50,000 3-year car loan is at 10.5% compounded daily.
6) You borrowed ₱16,100 for 3 years at 2.7% compounded semi annually.
7) Your 4-year investment of ₱20,000 received 4.2% interested compounded semi annually.
8) You borrowed ₱55,000 for 5 years at 10% which was compounded annually.
9) Your allowance of ₱290 got 8% compounded monthly for 6 years.
10) Your 7-year investment of ₱20,000 at 4% compounded quarterly.

Interest Rate Number of


Time Total Interest
Principal Amount per annum compounding Future Value
(in years) Earned
(decimal) periods per year
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
Test II. Answer neatly and orderly. Round off answers to two decimal places if necessary.
1. Sarah has ₱1000 to invest. Should she invest it in an account that pays at a rate of 1.75%
compounded daily or in the account that pays at a rate of 1.65% compounded continuously?
Explain your answer. (5points)
2. How much money would you need to deposit today at 9% annual interest compounded
monthly to have ₱12,000 in the account after 6 years?(5points)
3. What is the annual interest rate necessary to discount a future amount of ₱100,000 to a
present value of ₱67,000 over a five-year period, assuming the interest is
compounded quarterly?(5 points)
4. A future amount of ₱1,000 will be due in exactly two years. The obligation can be settled
today for ₱790. What is the annual interest rate involved in this arrangement if interest
is compounded monthly?(5 points)
5. Assume that you have ₱2,000 to invest today and in four years you would like the investment
to be worth ₱3,500. What compound annual rate of interest would you need to earn?
(5points)

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy