Lesson 3

Compound
Interest
 Objectives

At the end of this lesson, the learner should be able to

● properly differentiate compound from simple

interest;

● accurately calculate compound amount and

compound interest; and

● correctly solve problems involving compound

interest.
 Essential Questions

● How will you calculate a compound amount?

● How will you calculate a compound interest?

● How will you solve problems involving compound interest?

Let’s review the following:

• What is the formula for Simple Interest?

• What is the formula for the Maturity Value at

Simple Interest?

Write the answers on the board

Review:

Lelouch owes Linda ₱5 000. He promised to pay the

said amount in 2 years at 5% simple interest.

1. How much is the interest?

2. What is the maturity value after 2 years?

 Learn about It!

Compound Interest
1 interest calculated on the total of the principal and previously calculated interests

Example 1:
A principal of P100,000 is invested in a bank at 5% interest
rate compounded annually. Using a table, find the maturity
value of the invested money after 4 years.
 Learn about It!

Year (t) (P) Principal (r) rate (I) Interest (F) Maturity
Value
1

4
 Learn about It!

Year (t) (P) Principal (r) rate (I) Interest (F) Maturity
Value
1 100,000 5% 100,000(.05)=5000 105,000

4
 Learn about It!

Year (t) (P) Principal (r) rate (I) Interest (F) Maturity
Value
1 100,000 5% 100,000(.05)=5000 105,000

2 105,000 5% 105,000(.05)=5250 110,250

4
 Learn about It!

Year (t) (P) Principal (r) rate (I) Interest (F) Maturity
Value
1 100,000 5% 100,000(.05)=5000 105,000

2 105,000 5% 105,000(.05)=5250 110,250

3 110,250 5% 110,250(.05)=5512.5 115,762.5

4
 Learn about It!

Year (t) (P) Principal (r) rate (I) Interest (F) Maturity
Value
1 100,000 5% 100,000(.05)=5000 105,000

2 105,000 5% 105,000(.05)=5250 110,250

3 110,250 5% 110,250(.05)=5512.5 115,762.5

4 115,762.5 5% 115,762.5(.05)=5788.13 121,550.63

 Learn about It!

Example 1:
A principal of P100,000 is invested in a bank at 5% interest
rate compounded annually. Using a table, find the maturity
value of the invested money after 4 years.

ANSWER:
M = 121,550.63
 Learn about It!

FORMULA for Future/Maturity Value at Compound Interest

𝑴 = 𝑷(𝟏 + 𝒓)𝒕

Where M = Future/Maturity Value

P = Principal
r = rate
t = time in years
 Learn about It!

Use the formula to find the Maturity Value of the

given principal after 4 years in Example 1.
 Learn about It!

FORMULA for Compound Interest

𝑰𝒄 = 𝑴 − 𝑷

where Ic = Compound Interest

M = Future/Maturity Value
P = Principal
 Learn about It!

Use the formula to find the Compound Interest

earned after 4 years in Example 1.
 Learn about It!

Example 2:

Suppose P15,000 is invested at 2% compounded annually for

5 years.

Find
a. Maturity Value
b. Compound Interest
Performance Task:
Group Activity
Instructions:

1. The class shall be divided into 4 groups

2. Each group will be given a unique problem that they have to solve

3. After 10 minutes, each group will have 2 representatives to show their

solutions to the class

RUBRIC
 Try It!

Group 1:

Gusion invested P10,000 in BPI at a 2% simple interest rate.

On the other hand, Lesley invested the
the same amount in BDO at 2% compounded annually.

Who will generate a greater amount of money after 3 years?

 Try It!

Group 2:

Two friends, Eugene and Isaiah, decided to invest their

money in two different people. Eugene invested P5000 in
Brencel at 3% simple interest, while Isaiah invested P5000
in Frennet at the same amount of interest compounded
annually.

Who will generate a greater amount of money after 4 years?

 Try It!

Group 3:

Efren would like to invest P12,000 for his date. George offered him a
10% simple interest, while Dwayne offered him an 8% interest
compounded annually.

Suppose Efren decides to have a date after 10 years. Which of the

two options will give him the advantage?
 Try It!

Group 4:

Hannah would like to surprise Ian by gifting him an investment of

P20,000 in the Wildrift Estate Cooperative at 5% simple interest.
One day, she came across another financial institution named ML
Bang Corporation, which offered the same interest rate compounded
annually.

Suppose Hannah is to invest the money for 5 years, and you are to
help her decide. Which of the two financial institutions would you
recommend to her?
 Essential Questions

Generally, which of the simple interest and compound

interest offers a greater advantage in investment? Explain.
 Try It!
Seatwork:
1. Nathan borrowed P100,000 at 8% compounded annually.
How much will he be paying after 2 years?
2. Sean invested P30,000 at 8% compounded annually. How
much will be his total money after 10 years?
3. Francis has loaned an amount of 12,500 at 9%
compounded semi-annually. How much should he pay
after 12 years?
 Learn about It!

2 Compounding Period
the time interval it takes for money to earn interest in a year

Example:
 Learn about It!

Nominal Rate
3 the annual interest rate that does not take into account the compounding period

Example:

If a loan earns an interest of 12% and is compounded

quarterly per annum, then 12% is the nominal rate.
 Learn about It!

Periodic Rate
4 the interest rate per compounding period; equal to the nominal rate divided by the
number of compounding periods in a year

Example:

If a loan earns an interest of 12% and is compounded

quarterly per annum, then 12% ÷ 4 = 3% is the periodic rate.
 Learn about It!

Compound Amount
5 the accumulated value of the principal and all interests from prior periods;
𝑟 𝑚𝑡
calculated using the formula M = 𝑃 1 + , where 𝑃 is the principal amount, 𝑟
𝑚
is the nominal rate, 𝑚 is the frequency of the compounding period, and 𝑡 is the
time in years.

Example:
What is the compound amount of a 10 000 pesos loan with an
interest rate of 10% compounded semiannually in 1 year?
 Learn about It!

Example:

𝑚𝑡 2 1
𝑟 0.10
𝑀 =𝑃 1+ = 10 000 1 + = 11 025
𝑚 2
 Try It!

Example 1: Jeff borrowed ₱20 000 at 8% compounded

quarterly for a year. Determine the amount Jeff has to pay at
the end of the loan term.
 Try It!

Example 1: Jeff borrowed ₱20 000 at 8% compounded

quarterly for a year. Determine the amount Jeff has to pay at
the end of the loan term.
Solution:
The problem asks for the final amount to be paid, which is the
compound amount. Thus, we can use the formula
𝑟 𝑚𝑡
𝑀 =𝑃 1+ .
𝑚
From the given problem, we have 𝑃 = 20 000, 𝑟 = 0.08, 𝑚 = 4
(since the compounding period is quarterly), and 𝑡 = 1 year.
 Try It!

Substituting the above values into the formula, we have the

following.
𝑟 𝑚𝑡
𝑀 =𝑃 1+
𝑚
4 1
0.08
= 20 000 1 +
4
= 20 000 1.02 4
= 21 648.64
Hence, Jeff has to pay a total of ₱𝟐𝟏 𝟔𝟒𝟖. 𝟔𝟒 at the end of the
loan term.
 Try It!

Example 2: How much will be the interest if ₱200 000 is to be

invested for 5 years at 5% interest rate compounded
semiannually?
 Try It!

Example 2: How much will be the interest if ₱200 000 is to be

invested for 5 years at 5% interest rate compounded
semiannually?
Solution:
1. To find the interest, we need to calculate the compound
amount first.
𝑃 = 200 000,
𝑟 = 0.05,
𝑚 = 2 (since the compounding period is semiannually), and
𝑡 = 5 years.
 Try It!

Substituting these values to the formula for the compound

amount, we have the following.

𝑟 𝑚𝑡
𝑀 =𝑃 1+
𝑚 2(5)
0.05
= 200 000 1 +
2
= 200 000 1.025 10
= 256 016.91
 Try It!

2. Deduct the principal amount from the compound amount.

𝐼 =𝑀−𝑃
= 256 016.91 − 200 000
= 56 016.91

Therefore, the investment will earn ₱𝟓𝟔 𝟎𝟏𝟔. 𝟗𝟏 in interest

after 5 years.
 Let’s Practice!

Individual Practice:

1. Errol deposited his ₱25 000 in a bank that offers 5%

interest compounded quarterly. If he decided to invest the
money for 5 years, how much will be the total amount in
his bank account?

2. How much will be the interest if ₱500 000 is to be invested

for 10 years at 2% interest rate compounded monthly?
 Let’s Practice!

Group Practice: To be done in groups of four.

Which has more earnings in a year: ₱50 000 invested at 10%

interest rate compounded semiannually or₱50 000 invested
at 8% interest rate compounded monthly?
Key Points

Compound Interest
1 interest calculated on the total of the principal and previously calculated interests

2 Compounding Period
the time interval it takes for money to earn interest in a year

Nominal Rate
3 the annual interest rate that does not take into account the compounding period
Key Points

Periodic Rate
4 the interest rate per compounding period; equal to the nominal rate divided by the
number of compounding periods in a year

Compound Amount
5 the accumulated value of the principal and all interests from prior periods;
𝑟 𝑚𝑡
calculated using the formula M = 𝑃 1 + , where 𝑃 is the principal amount, 𝑟
𝑚
is the nominal rate, 𝑚 is the frequency of the compounding period, and 𝑡 is the
time in years.
 Synthesis

● How do you calculate a compound interest?

● How does knowing compound interest help you in your

decision-making regarding finances?

● How can you apply the concept of compound interest in

solving word problems?