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Questions and Answers
What is compound interest?
What is compound interest?
Compound interest is the interest added to the principal of an investment or a loan so that the added interest also earns interest.
What is compounding?
What is compounding?
Compounding is when interest is added to the principal amount, and then the next interest calculation is made on the new principal (principal plus the interest earned).
What is the time interval between succeeding interest calculations called?
What is the time interval between succeeding interest calculations called?
What is the number of compounding that takes place in a year called?
What is the number of compounding that takes place in a year called?
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What is the nominal interest rate?
What is the nominal interest rate?
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What is the periodic interest rate?
What is the periodic interest rate?
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How many times a year is interest compounded annually?
How many times a year is interest compounded annually?
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How many times a year is interest compounded quarterly?
How many times a year is interest compounded quarterly?
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How many times a year is interest compounded bimonthly?
How many times a year is interest compounded bimonthly?
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In the compound interest formula, what does MV stand for?
In the compound interest formula, what does MV stand for?
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The ______ value is the initial amount invested or borrowed.
The ______ value is the initial amount invested or borrowed.
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The ______ value is the total amount received after the investment or loan period.
The ______ value is the total amount received after the investment or loan period.
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What amount must be invested now in a savings account earning 6% compounded quarterly to accumulate a total of P25,000.00 after 4 years?
What amount must be invested now in a savings account earning 6% compounded quarterly to accumulate a total of P25,000.00 after 4 years?
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Ms. Carla Oliveros borrowed an amount 30 months ago at 14% compounded semi-annually. If the combined principal and interest is now P75,160.00, how much of that is the principal?
Ms. Carla Oliveros borrowed an amount 30 months ago at 14% compounded semi-annually. If the combined principal and interest is now P75,160.00, how much of that is the principal?
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Ms. Sofia Traje paid P88,600.00 on a loan made 2 years before at 11.2% compounded bi-monthly. How much of that amount is the principal?
Ms. Sofia Traje paid P88,600.00 on a loan made 2 years before at 11.2% compounded bi-monthly. How much of that amount is the principal?
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Study Notes
Compound Interest
- Compound interest is interest calculated on both the principal amount and the accumulated interest from previous periods.
- The principal amount is the initial amount of investment or loan.
- Compounding involves adding the interest to the principal, so that the added interest also earns interest.
Objectives
- Illustrate compound interest.
- Calculate interest and present value in compound interest scenarios.
- Solve word problems involving compound interest.
Terms Related to Compound Interest
- Conversion Period: The time interval between successive interest calculations.
- Compounding Period: The time interval between succeeding interest calculations.
- Interval Period: The same as the conversion period.
- Compound Frequency: The number of compounding periods in a year.
- Conversion Frequency: The same as compound frequency.
- Nominal Interest: The annual interest rate used in the compound interest calculation.
- Periodic Interest Rate: Interest earned during one conversion period.
Compounding Frequencies and Periods
| Compounding or Conversion Frequency | Number of Compounding or Conversions per Year |
|---|---|
| Annually | 1 |
| Semi-annually | 2 |
| Quarterly | 4 |
| Bimonthly | 6 |
| Monthly | 12 |
Formula for Maturity Value (MV)
-
MV = PV (1 + i)n
-
Where:
- MV = Maturity Value
- PV = Present Value (Principal)
- i = Interest rate per conversion period
- n = Total number of conversion periods
- j = Nominal interest rate per year
- m = Number of conversion periods per year
- t = Term (number of years)
-
i = j / m
-
n = mt
Formula for Present Value (PV)
- PV = MV / (1 + i)n
Sample Problems and Solutions (Examples of Calculations)
- Include detailed worked examples of calculating compound interest for various scenarios, including different interest rates, compounding periods, and timeframes. (Solutions provided in the document)
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Description
This quiz covers the fundamentals of compound interest, focusing on its definition, calculation methods, and practical applications. You will learn to illustrate, compute, and solve problems related to compound interest and its various terms such as conversion period and compounding frequency.
