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24 views4 pages

Inbound 236027839187127551

jsu

Uploaded by

nicole.peligrino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS MATHEMATICS

Lesson 7.3 : INTERESTS


I. Overview:

• This lesson will demonstrate key concepts of Interests.

II. Objectives:

• At the end of the lesson, the student is able to:


(1) to solve problems involving Compound Interest.

III. Content Outline:

Please take time to read and understand this part because all graded activities and quizzes will be
coming from these contents.

IV. Lesson Content

The second type of interest is called compound interest. Before we define


this type of interest, let us recall the definition of simple interest so we can
understand the difference between the two. We have discussed that the simple
interest is computed on the principal amount only. This means that regardless of the
period of the transaction, the interest rate is only multiplied by the principal amount.
In contrast to simple interest, compound interest is an interest that is
computed on the principal amount and on any interest that is accumulated during the
period of the transaction. In other words, the interest rate is multiplied by the sum of
the principal amount and the accumulated interest after a certain period. To illustrate
how compound interest is applied, consider the next situation.
Example 1. Determining the Interest
Angel invested ₱50,000 at a 15% interest rate, compounded yearly.
Determine the future value of your investment after 3 years.
Solution and Answer:
To solve this, we need to compute for the future value of investment at the end
of each of the 3 years. Let A1 be the future value after 1 year. Using the formula A =
P(1+RT), we have:
A1 = P(1+RT)
= 50,000[1 + (0.15)(1)]
= 57,500
The result means that after 1 year, your money will grow to ₱57,500. This
amount will be used as the new principal amount for the second year. Let A2, be the
future value after the second year. Using P = A1 in A = P(1+RT), we have:
A2 = A1(1+RT)
= 57,500[1 + (0.15)(1)]

1
= 66,125
This resulting value A2, will be used as the new principal amount for the third
year. Let A3 be the future value after the third year. Using P = A2 in A=P(1+RT), we
have:
A3 = A2(1+RT)
= 66,125 [1 + (0.15)(1)]
= 76,043.75
Therefore, at 15% interest, compounded yearly, the 50,000 investment will
grow to 76,043.75 after 3 years.
The formula provides a shorter way for calculating the future value of an
investment when a compound interest is applied.

Formula in Calculating the Future Value Based on Interest Compounded yearly


Let P be the principal amount and R be the annual interest rate, compounded yearly.
The future value A1 after T years may be computed as follows:
At= P(1+R)t

Example 2. Determining the Future Value based on Yearly Compounded


Interest
The Lachica Corporation invests 50,000,000 in a bank that offers an annual
interest of 6%, compounded yearly. How much will be the future value of this
investment after 10 years?
Solution and Answer:
The problem involves compound interest and we need to determine the future
value At. The following information are given: P = ₱ 50,000,000, R = 6%, and T = 10
years. By substituting these values to the formula for future value, we have:
At = P(1+r)t
= 50,000,000 (1+0.06)10
= 89, 542, 384.83
Therefore, the Lachica Corporation investment will grow to approximately
₱89, 542, 384.83 after 10 years.

There are cases when the interest is compounded, not on a yearly basis, but
on a semi-annual, quarterly, monthly, or even daily basis. In such cases, we need to
use the general formula for compound interest, which is stated below.

General Formula in Calculating the Future Value Based on Compounded Interest


Let P be the principal amount, R be the interest rate, and n be the number of times the
compounding occurs each year. The future value At after t years may be computed as:
2
𝑅 nt
At = 𝑃 (1 + )
𝑛
Notice that compared to the previous formula for future value, a new variable
(n) is used in general formula. As stated above, the variable n stands for the number
of times the compounding occurs each year. Refer to the following periods that are
commonly used as basis for compounding interests and the corresponding values of
n:
Period Meaning Value of n
Compounding occurs once
Annually n=1
each year.
Semi- Compounding occurs 2
n=2
annually times each year.
Compounding occurs 4
Quarterly n=4
times each year.
Compounding occurs 12
Monthly n = 12
times each year.
Compounding occurs 365
Daily n = 365
times each year.

In cases when the interest is compounded annually (that is, when n = 1),
observe that the given formula will become the previous formula for future value, as
shown below.
𝑅 𝑅
At = P(1 + 𝑛) nt = At = P(1 + 1 ) 1t = P (1 + R) t

Example 3. Determining the Future Value based Compounded Interest


Suppose you invest 50,000 at a 15% interest rate, compounded semi-
annually. Determine the future value of your investment after 3 years.
Solution and Answer:

3
The following were the given information in the problem: P = 50,000, R =
15%, and T = 3 years. Also, since the interest is compounded semi-annually, we
have n = 2. If we substitute these values to the general formula for future value, the
following will be the result:
𝑅
At = P(1 + 𝑛) nt
0.15 (2)(3)
A3 = 50,000(1 + )
2

= 77, 165.08
Therefore, your investment will become approximately 77,165.08 after 3
years.

V. Activity:
NAME/SECTION: __________________________________ DATE:
______________

ACTIVITY 1 COMPOUND INTEREST

Direction: Solve the following problems.


1. A woman will invest 70,000 in a bank that offers a 4% interest, compounded yearly. How much
will be the future value of the investment after 12 years?
2. Consider item 1. Suppose another bank offers the woman a 5% interest, compounded
quarterly. How much will be the future value of the investment after 12 years?
3. At a simple annual interest of 6%, how much should be the principal amount in order to gain
432,500 at the end of 5 years?
4. A pensioner deposits 70,000,000 in a bank account.
a. If the bank gives 4% interest, compounded quarterly, how much will be his money after
10 years?
b. Suppose the bank gives 4% interest, compounded monthly, how much will be his
money after 10 years?
c. What is the difference between the two future values in items (a) and (b)?

VI. Assignment
Use the internet to research on the Finance charges and its unpaid balance.

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