Interest, Maturity, Future,
and Present Values in
Simple and Compound
Interests
QUARTER 2 - MODULE 2
This lesson composed of two
lessons, namely;
Lesson 1 – Interest, Maturity, Future
and Present Values in Simple
Interest
Lesson 2 – Interest, Maturity, Future,
and Present Values in Compound
Interest
After going through this
module, you are expected to:
1. Compute interest, maturity value, future
value, and present value in simple interest
environment;
2. Compute interest, maturity value, future
value, and present value in compound
interest environment; and
3. Derive the formula of simple and compound
interest to compute the maturity, future,
and present value.
Interest,
Maturity, Future
and Present
Values in Simple
Interest
Simple Interest formula:
Where :
= simple interest
P = principal or the amount
invested or borrowed or
present value.
r = simple interest rate
t = time or term in years
The formula can be manipulated to
obtain the following relationships:
The formula for finding the principal
amount:
The formula for finding
rate
The formula for finding time
To find the maturity (future)
value, you can use either of the
following:
F = P(1 + rt)
or
F=P+
Where:
F = maturity (future) value
= simple interest
P = principal or the amount invested
or borrowed or present value
r = simple interest rate
t = time or term in years
Example
Given : P = ₱18,500, r = 0.03, t = 5. Find simple interest
Solution:
Use the formula of simple interest = Prt
Substitute the given to the formula =
18,500(0.03)(5)
Performing the operation =
₱2,775
Therefore, the simple interest is ₱2,775.
Example
Given : P = ₱20,000, = ₱4,000, t = 4 . Find the rate (r)
Solution:
Use the formula finding rate
r=
Substitute the given to the formula r=
Performing the operations
r = 0.05
Express your answer in percent r
= 5%
Example
Given : P = ₱40,000, r = 7%. Find time (t).
Solution:
Use the formula in finding the time t=
Substitute the given to the formula t=
Performing the operations t
= 0.25
Express your answer as unit of time t=¼
year or 3 months
Therefore, the term or time in years is ¼ year or 3 months.
Example
Given : P = ₱15,000, t = 4 months, r = 2%. Find maturity (future)
value (F).
Solution :
Use the formula of maturity value F=
P(1+rt)
Substitute the given to the formula F=
15,000(1+(0.02)())
Hint : time must be expressed in years so 4 months will become =
year
Performing the operations
F = 15,100
Alternative Solution:
Solve first the simple interest = (15,000)(0.02)
()
= 100
Use the formula F = P + F = 15,000 +
100
F = 15,100
Interest,
Maturity, Future
and Present
Values in
Compound
In previous lesson Maturity value
is computed using the formula
F= +P
Where;
F = future value
= simple interest
P = principal or present
value
Maturity value formula in finding
Principal or Present value
P=F-
Where;
P= Principal or Present value
F = Future value
= Simple Interest
Notice that there is a difference between the
computation of Michael and the bank concerning the
amount to be paid for the loan. Michael used simple
interest to find the amount to be paid for the loan for
tree years. While, the bank computes first the interest
for the first year and added it to the amount of loan,
then the resulting amount becomes the basis for
computing the total amount to be paid for the second
year and it follows the same pattern for the third year.
Interest plays a major role in computation because it
became one of the factors in determining the amount to
be paid for the succeeding years. In such a case, we call
that compound interest. To gain a better understanding
of what compound interest is, the following formulas will
be taken in to consideration.
To find compound interest, which
is compounded annually the
formula to find the maturity value
is:
F = P (1+r
Where ;
F = maturity (future) value
P = principal or present value
r = interest rate
t = term or time in years
To find the compound interest use
the formula:
=F–P
Where;
= compound interest
P = principal or present value
F = maturity (future) value
To find the present value or
principal of the maturity formula
are:
P=
or
P = F(1+r
Example
Given : P = ₱18,500, r = 3% and compounded
annually for 3 years, find the maturity value (F) and
the compound interest ().
Solution:
Use the formula of maturity value F = P(1
+r
Substitute the given formula F = 18,500
(1 + 0.03
Performing the operations F=
Finding compound interest
Apply the formula of compound interest = F – P
Substitute the value of F and P = 20,215.45 –
18,500
Performing the operations = ₱1,715.45
Therefore, the maturity value is ₱20,215.45 and the
compound interest ₱1,715.45
Example
Given : F = ₱15,000, r = 2% compounded annually
for 4 years, find the present value (P).
Use the formula in finding the present value
P=
Substitute the given to the formula P=
Performing the operations P=
₱13,857.68
Compounding More Than Once a
Year
In the examples above the interest
are compounded annually, however,
there are cases that interest are
compounded more than once a year
so in this case additional terms must
be clarified such as:
Frequency of conversion (m) – number of
conversion period in one year
Conversion or interest period – time between
successive conversions of interest
Total number of conversion period (n)
n = mt
(frequency of conversion) x (time in years)
Nominal rate () – annual rate of interest or
interest rate per year.
Rate ( j ) of interest for each conversion
period
j=
Since the rate for each conversion period
is represented by j, then in t years,
interest is compounded mt times. Thus,
the formula of Maturity Value for interest
compounding m times a year is :
F = P(1 + j
F = P(1 + j
Where:
F = maturity value
P = present value
j=
n = mt
Meanwhile, the formula in finding the
present value given the maturity value is:
P=
Where:
F = maturity value
P = present value
j=
n = mt
Example
Given : P = ₱50,000.00, = 0.03, m = 4, t =
4, find F and .
Solution:
Use the formula F = P(1+ j
Solve for n and j n = mt ; n =
4(4); n = 16
j
= ; ; j = 0.007
Substitute the values of the known variables
F = 50,000(1 + 0.0075
Performing the operations F = 56,349.61
Use the formula of compound interest =F–P
Substitute the values of F and P
= 56,349.61 – 50,000
Performing the operation = 6,349.61
Therefore, the maturity value is
₱56,349.61 and the compound
interest is ₱6,349.61
Example
Given: F = ₱45,000.00, = 0.02, m = 2, t = 4. find
present value and .
Use the formula for Present Value P=
Solve for n and j n = mt ; n = 2(4) ; n
=8
j = ; ;
j = 0.01
Substitute the variables of the known variables
P=
Performing the operations P = 41,556.75
Use the formula for compound interest =F–P
Substitute the values of F and P = 45,000 –
41,556.75
Performing the operation = ₱3,443.25
Therefore, the present value
is ₱41,556.75 and the
compound interest is
₱3,443.25
