General Mathematics

Quarter 2 - Module 2:
Compound Interest
General Mathematics
Alternative Delivery Mode
Quarter 2 - Module 2: Compound Interest
First Edition, 2020

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 What I Need to Know

This module was designed and written with you in mind. It is here to help you
master the lesson about Compound Interest. The scope of this module permits it to be
used in many different learning situations. The language used recognizes the diverse
vocabulary level of students. The lessons are arranged to follow the standard sequence
of the course. But the order in which you read them can be changed to correspond with
the textbook you are now using.

The module is divided into two lessons, namely:

 Lesson 1 - Define and Illustrate a Compound Interest
 Lesson 2 - Solve problems involving Compound Interest

After going through this module, you are expected to:

1. define and illustrate a Compound Interest;
2. compute interest, maturity value, future value, and present value in a
compound interest environment; and
3. solve problems involving compound interest.

What I Know

Choose the letter of the best answer. Write the chosen letter on a separate sheet
of paper.

1. What do you call the interest that an investor earns on his original investment
plus all the interest earned on the interest that have accumulated over time?
A. simple interest C. interest rate
B. compound interest D. interest

2. This refers to the amount after t years that the lender receives from the
borrower on the maturity date.
A. principal amount C. future value
B. interest D. annual rate

3. What is true about simple interest vs. compound interest?

A. compound interest is always greater than a simple interest.
B. compound interest is always equal to a simple interest.
C. compound interest is sometimes greater than a simple interest.
D. compound interest is sometimes smaller than a simple interest.

4. What is the formula in order to find the maturity value in a Compound Interest?
A. 𝐹 = 𝑃(𝑟𝑡) C. 𝐹 = 𝑃(1 + 𝑟)𝑡
B. 𝐹 = 𝑃(1 + 𝑟) D. 𝐹 = 𝑃(1 + 𝑟)−𝑡

5. Which of the following is the same as 0.5% when converted to decimal?

A. 0.5 C. 0.005
B. 0.05 D. 5.0

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 6. What formula is used to find the present value in a Compound Interest?
𝐹
A. 𝑃 = 1+𝑟 C. 𝑃 = 𝐹(1 + 𝑟)𝑡
𝐹
B. 𝑃 = (1+𝑟)𝑡
D. 𝑃 = 𝐹(𝑟𝑡)

For numbers 7-8

In solving for a compound interest.

Given: P = ₱25,000: r = 1%; t = 2 years

7. How much will be the F (future value) if this is compounded annually?

A. ₱25 500.00 C. ₱30 250.00
B. ₱25 502.50 D. ₱30 252.50

8. What is the amount of interest after 2 years?

A. ₱500 C. ₱250
B. ₱502.50 D. ₱252.50

For numbers 9-10

You wish to obtain an amount of ₱150 000 in 5 years, if your money earns at
4% compounded annually.

9. How much money must be invested?

A. ₱123 289.07 C. ₱144 230.77
B. ₱125 000.00 D. ₱182 497.94

10. How much is the amount of the compound interest?

A. ₱25 769.23 C. ₱26 710.93
B. ₱25 000.00 D. ₱32 497.94

Lesson Definition and Illustration of

1 Compound Interest

What’s In

In the previous lesson, you learned about simple interest, an interest earned on
the original principal only.
Suppose you deposit ₱10 000.00 into a savings account with 5% simple interest
rate for 3 years, how much would be the interest after 3 years?
Solution:
Using the Formula I = Prt;
Principal: ₱10 000; rate: 5%; time: 3 years
Interest = (₱10 000) (0.05)(3)
I = ₱1 500.00
Therefore, the interest of ₱10 000.00 in 3 years will be ₱1 500.00

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 What’s New

Suppose you deposit the same ₱10,000.00 at 5% interest compounded annually,

how much will be the interest in 3 years
Solution:
Year 1: ₱10 000.00 (0.05) (1) = 500 added to the new principal
Year 2: ₱10 500 (0.05) (1) = 525 added to the new principal
Year 3: ₱11 025(0.05) (1) = ₱551.25 added to the new principal

YEAR 3

YEAR 2
11 025 + 551.25
YEAR 1
10 500 + 525
₱11 576.25
10 000 + 500 ₱11 025
Since 𝑰𝒄 = F – P therefore the
Compound Interest is
₱10 500
₱1 576.25
Simple Interest vs. Compound Interest
In computing for the simple interest, the amount of ₱10 000 in 3 years at 5%
rate of interest is ₱11 500; while in the compound interest, the amount is
₱11 576.25 a difference of ₱76.25.
Note: Because interest is paid on interest, compound interest is ALWAYS
greater than simple interest.

What is it

Maturity (Future) Value and Compound Interest

Formula: 𝑭 = 𝑷( 𝟏 + 𝒓 )𝒕
where,
P = principal or present value
F = Maturity (Future) value at the end of the terms
r = interest rate
t = (term) time in year

This is the basic formula for compound interest, remember

this because this is very useful.

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Illustrative Example:
Find the maturity value and the compound interest if ₱20 000.00 is
compounded annually at an interest rate of 3% in 5 years.
Given: P = ₱20 000.00; r = 3% or 0.03; t = 5
Find F and 𝑰𝒄
Solution:
Using the Formula, 𝑭 = 𝑷( 𝟏 + 𝒓 )𝒕
(a) F = 20 000 (1 + 0.03)5
F = 20 000 (1.03)5
F = ₱23 185.48
(b) 𝐼𝑐 = F – P
= ₱23 185.48 - ₱20 000.00
𝐼𝑐 = ₱3 185.48
Therefore, the Future Value (F) is ₱23 185.48, and the compound interest is ₱3 185.48

Present Value (P) at Compound Interest

𝑭
Formula: 𝑷 = 𝑭( 𝟏 + 𝒓 )−𝒕 𝒐𝒓 𝑷 = (𝟏+𝒓)𝒕

where,
P = principal or present value
F = Maturity (Future) value at the end of the terms
r = interest rate
t = (term) time in year

Illustrative Example:
Find P, if F = ₱85,000: r = 4% or 0.04: t = 5 years compounded annually
Solution: Alternative solution:
Since, 𝑷 = 𝑭( 𝟏 + 𝒓 )−𝒕 𝑭
𝑷=
(𝟏 + 𝒓)𝒕
P = 85 000 ( 1 + 0.04 )−5 𝟖𝟓,𝟎𝟎𝟎
P = (𝟏+𝟎.𝟎𝟒)𝟓
P = ₱69 863.80 P = ₱69 863.80

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 Lesson Solving Problems Involving
2 Compound Interest

Now, let’s solve problems involving compound interest.

Example 1: If an amount of ₱5 000 is deposited into a savings account at an annual

interest rate of 5% compounded annually, the value of the investment after 10 years can
be calculated as follows:

Using the Formula, 𝑭 = 𝑷( 𝟏 + 𝒓 )𝒕

F = ?. P = ₱5 000: r = 5% or 0.05: t = 10
Solution:
So, the value of ₱5 000 investment in 10
F = 5 000 ( 1 + 0.05) 10
years will be ₱8 144.47 that will earn an
interest of ₱3 144.47
5 000 ( 1.05)10
F = ₱8 144.47
Example 2: What is the Present value of ₱150 000 due in 10 years, if money is worth
10% compounded annually?

Using the Formula, 𝑷 = 𝑭( 𝟏 + 𝒓 )−𝒕

P = 150,000 ( 1 + 0.10 )−10
P = ₱57 831.49
Example 3: A father wishes to have ₱200 000.00 available for his daughter’s college
education. If her daughter is now 16.5 years old, how much money must the father
invest at 4% interest compounded annually in order to have ₱200 000.00 when his
daughter turns 18?
Given: F = 200,000: r = 4%: t = 1.5 years; P = ?
Solution: Using Formula, 𝑷 = 𝑭( 𝟏 + 𝒓 )−𝒕

P = 200,000 ( 1 + 0.04 )−1.5

P = ₱188 573.21

The father must invest ₱188 573.21 for his daughter’s

college education

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 What’s More

ACTIVITY: Find the unknown Maturity value F, Principal P, rate r, time t, and
Compound Interest 𝑰𝒄 by completing the table.

Maturity Compound
Principal (P) Rate (r) Time (t)
Value (F) Interest (𝑰𝒄 )
₱8 000 3% 10 (1) (2)
8 years &
₱25 000 2.5% (3) (4)
3 mos.
(5) 1% 6 (6) ₱50 000
4 years &
₱70 000 7.5% (7) ₱96 925.07
6 mos.
₱78 352.62 5% 5 (8) ₱100 000

What I Have Learned

Compound Interest ( 𝑰𝒄 ) – interest is computed on the principal and on the

accumulated past interest.
Maturity Value or Future Value (F) – amount after t years that the lender
receives from the borrower on the maturity date.
Principal (P) – amount of money borrowed or invested on the origin date.
Rate(r) – annual rate usually in percent, charged by the lender or rate of
increase of the investment
Time or term (t) – amount of time in years the money is borrowed or invested
length of time between the origin and maturity dates.

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 What I Can Do

Problem Solving. Read and analyze the following problems. Identify what are given
and use appropriate formula. Show your complete solution.
1. A deposit of ₱3 000.00 earns 2% interest compounded annually, how much
money is in the bank after 4 years?

2. A deposit of ₱2 150 earns 6% interest compounded annually. How much money

is in the bank after 6 years?

3. In order to have ₱500 000.00 in 10 years, how much should you invest, if the
compound interest is 12%?

4. How much money must be invested to obtain an amount of ₱300 000.00 in 5

years, if money earns at 10.5% compounded annually?

5. A time deposit account in a bank yields 4% compound interest annually.

Margaret invested ₱50 000.00 for 4 years in this savings account. How much
interest will she gain?

Assessment

Multiple Choice. Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.

1. What do you call the amount of money borrowed or invested on the origin
date?
A. future value C. principal
B. origin D. maturity value

2. Which of the following functions is used to solve present value under a

compound interest?
𝐹
A. P = F ( rt ) C. P = ( 1+𝑟 )𝑡
𝐹
B. P = F ( 1 + r ) D. P = ( 1+𝑟 )−𝑡

For numbers 3–4

A certain investment amounts ₱72 900.00 in 2 years at 8.25% per
annum compound interest.
3. What is unknown in this problem to find the amount of interest?
A. present value C. compound amount
B. future value D. time in years

4. What is the equivalent of 8.25% when changed to decimal?

A. 82.5 C. 0.825
B. 8.25 D. 0.0825

5. What is the maturity value on deposit at the end of 3 years if ₱8 000.00

is deposited at 4% compounded annually?
A. ₱8 998.91 C. ₱7 111.97
B. ₱8 960.00 D. ₱7 550.00

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 6. How much will be the compound interest in the problem given in number
5?
A. ₱998.91 C. ₱888.03
B. ₱960.00 D. ₱450.00

7. Which of the following is used to find the Compound Interest?

A. 𝐼𝑐 = P – F C. 𝐼𝑐 = F - P
𝑃
B. 𝐼𝑐 = Prt D. 𝐼𝑐 =
𝐹

For numbers 8-10

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If the principal amount is ₱12 00.00 that earns 74 % interest
compounded annually for 10 years
8. What is the maturity value?
A. ₱26 358.34 C. ₱25 762.89
B. ₱26 368.34 D. ₱25 752.89

9. What is the maturity value if simple interest is applied?

A. ₱22 125.00 C. ₱134 687.50
B. ₱22 187.50 D. ₱221 875.00

10. If this is an investment, which of the following gives a better deal?

A. Earns 5% simple interest annually for 10 years.
B. Earns 10% simple interest annually for 5 years.
C. Earns 5% compound interest annually for 10 years.
D. Earns 10% compound interest annually for 5 years.

Additional Activities

ENRICHMENT:
1
Princess is thinking of investing an amount of ₱40 000.00 for 2 2 years. Find
the future value based on the following investments.
a. Simple interest at 7.5%
b. 7.5% compounded annually
c. Which investment is BETTER? Justify your answer.

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