INTEREST
Sarah
NEWS
Learning Outcomes
Compare simple
interest and
Apply the formulas
compound interest
of simple and
outcomes in
compound interest
practical financial
to solve real-world
decision-making,
financial problems.
such as loans and
savings.
Introductio
n When we borrow some money from a
person, bank or cooperative society for a
specific period, we pay back money along
with some additional amount for using
that money for a certain period.
This additional amount
is called Interest. Sum including
interest &
principal is
Borrowed
called amount.
amount is called
principal, time
To calculate
period is
Interest we
number of
need to know
years/ months.
amount &
period for
which it is
borrowed &
Simple Interest
Simple Entire period
Interest (I) is of Rates of
the interest computation, interest are
calculated on interest is usually
original calculated on expressed as
amount principal percentage.
borrowed. amount.
Simple Interest
Simple interest = Principal ×Rate
×Time
I=Pxr xt
Where
I: Interest- amount of money that you pay to borrow
money or amount of money that you earn on a
deposit.
P: Principal which is original sum of money
t: Time duration for which money is borrowed/
deposited.
r: Rate of interest which is usually expressed as
percent that is paid for money borrowed, or earned
Simple Interest
Simple interest = I = P x r x t
Amount: (total amount due at end of
the period)
Amount (A) = P+I
= P + (P x r x t)
= P (1 + rt)
Example 1
To buy a new car, Ramesh borrowed
Rs. 5,00,000 at 8% annual simple
interest for 3 years. How much
interest will he pay?
Example 1
Simple interest = Principal ×Rate ×Time
I=Pxr xt
P = 5,00,000, r = 8/100=0.08, t = 3 years, I
=?
Simple Interest (I) = 500000 × 0.08 × 3 =
Rs. 1,20,000.
Ramesh will pay Rs. 1,20,000 as interest for
the car loan.
Example 2
Aditya deposited Rs. 1,50,000 to a
bank at 9.8% interest p.a. Find the
total interest that he will receive at the
end of 5 years. Also find the amount he
will get.
Example 2
Simple interest = I = P x r x t
P = 1,50,000, r = 0.098, t = 5, I=?A =?
I= 150000 × 0.098 × 5 = Rs. 73,500.
Aditya will get Rs. 73,500 as interest.
Amount = P + I
150000 + 73500 = Rs. 2,23,500.
Aditya will receive Rs. 73,500 as interest
Amount of Rs. 2,23,500 after 5 years.
Note: We can also calculate amount using formula
A = P (1+ rt)
= 150000 [1 + (0.098×5)] =
Rs. 2,23,500
Example 3
Himanshi lends Rs. 45,000 to Rama. Find
the time required for this amount to yield
Rs. 9,900 in simple interest at 11% per
annum.
Example 3
I = 9,900,P = 45,000,r = 0.11,t =?
I=Pxr xt
Therefore: t = I/ P r
= 9900/ (45000)
(0.11)
= 2 (years).
Example 4
In how many years will a sum be double
of itself at 5% p.a. simple interest?
Example 4
Amount = 2 × Principal
Given r = 0.05, t=?
From A = P + P × r × t
A = P (1 + rt).
According to question,
2P = P [1 + t(0.05)]
2 = 1 + t (0.05)
t = 1/0.05 or, 20.
A sum will be double of itself at 5% p.a.
simple interest in 20 years.
Example 5
A sum of Rs. 1,20,000 was lent out for
2 years at simple interest. The lender
got Rs.1,53,600 in all. Find the rate of
interest per annum (p.a).
Example 5
P = 1,20,000,A = 1,53,600,t= 2,r=?
A = P (1 + rt)
That is,
153600=120000 (1
+2r)
153600 = 120000 +
240000 r
240000r = 153600 –
120000
r=
33600/240000
Example 6
Find the principal that will yield Rs.
500.50 as interest in 2 years at 5% p.a.
simple interest.
Example 6
I= 500.50,t = 2, r = 0.05,P =?
I = P × r × t,
500.50 = P × 0.05 × 2
500.50 = 0.10P
P = 5,005.
The required Principal is Rs. 5,005.
Example 7
In how much time will Rs. 17,000
become Rs. 22,100 at 10% p.a.
simple interest?
Example 7
P = 17,000, A = 22,100,r = 0.10,t
A = P (1 + rt)
22100 = 17000
[1+ t (0.10)]
22100 = 17000
+ 1700 t
1700 t = 5100
t=3
years
COMPOUND INTEREST
CI is
calculated not CI is calculated on
only on initial interest as well as
principal on principal.
amount but
also on CI is described as
accumulated
interest of ‘interest on
previous interest’
periods.
Example
If Rs. 5,000 is deposited at 5% per annum interest for 1 year,
at end of the year interest is Rs. 250.
Amount at end of year is Rs. 5,000 + Rs. 250 = Rs. 5,250.
If this amount is lent at 5% per annum interest for another
year, interest is calculated on Rs. 5,250 instead of the
original Rs. 5,000.
So amount in account at the end of the 2nd year is
Rs. 5,250 + (5,250 × 0.05 × 1)= 5,250 + 262.50 = Rs.
5,512.50
SI would produce a total amount of
5,000 + (5,000 × 0.05 × 2) = 5,000+ 500 = Rs.
5,500.
Additional Rs. 12.50 is the interest on Rs. 250 at 5% for one
year.
Concepts related to CI
CI is the
difference
between Compound
compound Amount - Total
amount & amount due at
original end of last period.
principal
amount.
Compounding
Frequency of
Period: Time
Compounding:
period between
Number of times
two consecutive
interest is
points in time at
compounded in
which interest is
one year.
compounded
Compound Amount
A = P ( 1 + i )n
i = r/k
n=k×t
A: Amount at end of t periods
P: Principal (original sum of money)
r: Annual rate of interest
k: No of compounding periods per year
t: Time duration in years (no of years)
n: Total no of compounding periods
i: Interest rate per compounding period
Example
If annual rate of interest is 10% &
compounding is quarterly, then there
are 4 compounding periods per year.
If annual rate of interest is 24% &
compounding is monthly, then there
are 12 compounding periods per
year.
Example
If annual rate of interest is 10% &
compounding is quarterly, then there
are 4 compounding periods per year.
i = 0.10/4 = 0.025
If annual rate of interest is 24% &
compounding is monthly, then there
are 12 compounding periods per
year.
i = 0.24/12 = 0.02.
Compound Interest
Formulas for different cases
Example 8
Bank pays compound interest at the rate
of 5% p.a. Yogi deposited a principal
amount of Rs. 5,000 in bank for 4 years.
Find the interest that Yogi will receive.
Example 8
P = 5,000, n = 4, i = 0.05, A =?
A = P ( 1 + i )n
A = 5000 (1+ 0.05)4
A = 5000 (1.215506)
A = Rs. 6,077.53.
I=A-P
I = 6077.53 - 5000
I = Rs. 1,077.53.
Yogi will get Rs. 1,077.53 as interest
from bank.
Example 9
Mehak deposited Rs. 50,000 in a finance
account that pays 8% interest,
compounded annually. How much
amount will be in her finance account
after 10 years?
Example 9
P = 50,000, i = 0.08, n = 10, A =?
A = P ( 1 + i )n
A = 50000 (1 + 0.08)10
1.08210 = 2.158925
A = 50000 (2.158925)
A = 1,07,946.25
Mehak will have Rs. 1,07,946.25 in her
finance account after 10 years.
Example10
Find compound interest on Rs. 8,000 for 5
years at 6% per annum interest
compounded
(i) semi-annually
(ii) monthly
Example10
A = P (1 + r/k)kt=
(i) (ii)
A = 8000(1+0.06/2)2 x A=
5 8000(1+0.06/12)12 x 5
A = 8000(1+ 0.03) 10 A = 8000(1+ 0.005)60
A = 8000 (1.348850)
1.343916
1.348850
A = 8000
A = Rs. 10,790.80.
(1.343916)
So,
A = Rs. 10,751.33. I = 10790.8 – 8000
We get, • I = Rs. 2,790.80.
I= 10751.33 –
8,000
I= Rs. 2,751.33
Example
A person had deposited Rs 20,000 each in
two banks, A and B. Both of the banks
offer 6 percent rate of interest. However,
in bank A interest is compounded
annually, while in bank B it is
compounded half-yearly. After 3 years
what will be the difference in the amount
of interest that he may get from bank A
and bank B?
Example 11
If an amount of Rs. 86,400 is invested
at 8% p.a. compounded quarterly, how
long will it take to accumulate Rs.
2,06,500.60?
Example 11
P = 86,400,r = 0.08,A = 2,06,500.60, t =?
A = P (1 + r/k)kt
206500.60 = 86400 (1 + 0.08/4)n
206500.60/86400 =(1.02) n
(1.02) n = 2.39005
n log 1.02 = log 2.390056
n(0.0086) = 0.378408
n = 0.378408/0.0086
= 44 quarters
= 11 years.
Required time is 11
years.
Example 12
If interest is compounded annually at
an interest rate of 6% p.a., then how
long will it take a principal to double
itself?
Example 12
P = P, A = 2P, r = 0.06,n =?
A = P (1 +r) n
2P = P(1 +0.06) n
2 = (1.06) n
log 2 = n log 1.06
n = log 2/ log 1.06
n = 0.3010/0.0253
n = 11.9 years (approx.).
Example 13
• A sum of money is deposited by Krishna which
compounds interest annually. Amount at the end of
2 years is Rs. 5,000 and at the end of 3 years is
5,200. Find money deposited and rate of interest.
Example 13
• A(1) =5,000,n = 2 and A(2) = 5,200, n =
3, P = ?,r = ?
A = P (1 + r) n
5000= P (1 + r) 2 … eq. Now, from eq (i),
(i) P = 5000/ (1 +
0.04) 2
5200= P(1 + r) …eq. (ii)
3
P = 5000/(1.04)
Dividing (ii) by (i) 2
5200/5000 = P(1 + r) 2/ P (1 + log P = Log 5000 – 2
r) 3 Log 1.04
= 3.69897 –
(1+ r) = 5200/5000
2 (0.0170)
r = 5200/5000 – 1 = 3.69897
r = 1.04 - 1 = 0.04. – .0340
= 3.66497
That is, required Rate of interest =
P = antilog
4%.
(3.66497)
= Rs.4,623
Example 14
Vidya’s savings account has a balance of Rs. 2,654.39.
The annual interest rate is 3% compounded monthly.
Find the original principal amount deposited two years
ago.
Example 14
A= 2,654.39,r = 3%,t=2, P =?
i= 0.03/12 = 0.0025
n = 2×12 = 24
A = P (1+i) 2
2654.39 = P (1 + 0.0025) 24
2654.39 = P (1.061757)
1.061757
P = 2654.39/1.061757
P = Rs. 2,500.
SPECIAL CASES OF COMPOUND RATE OF INTEREST
CONTINUOUS
COMPOUNDING
What if interest is
compounded daily
In such cases,
or hourly?
interest is
When
calculated &
compounding period
added to the
becomes very tiny &
principal amount
no of compounding
every extremely
periods per year
small time period
grows infinitely
such as hourly or
large, it is called a
minutely
case of continuous
compounding.
CONTINUOUS COMPOUNDING
A = Pert
A: Amount at end of t periods
P: Principal amount which is original
sum of money
r: Annual rate of interest
t: Time duration in years
COMPOUNDING AT CHANGING RATES
• We have discussed situations when rate
of interest is constant for entire time
period. However, in real life, interest rate
can change from time to time.
• Eg: Rashmi lends money to a friend for 2
years at 5% per annum rate of interest.
Her friend fails to pay money after 2
years. Rashmi increases loan tenure for 2
more years but now at 7% per annum.
• So, Final amount she will receive is
product of original principal & two
factors of form
• (1 + i)n or ert (with proper values of i & n
Example 15
If a businessman invests Rs. 50,000
at an annual interest rate of 5% per
annum compounded continuously,
calculate the amount he will have in
the account after five years.
ex 0.25 = 1.2840
Example 15
P = 50,000, r = 0.05, t = 5, A =?
A = Pert
we have A = 50000 e(0.05×5)
ex
0.25 = 1.2840
A = 50000 (1.2840) (using
ex value table)
A = Rs. 64,200.
Example 16
Difference between simple &
compound interest on a principal
deposited for 8 years at 3% per
annum is Rs. 267.7. Find principal
amount.
Example 16
r = 0.03,t = 8, C.I.- S.I. =Rs. 267.7.
Let principal amount be ‘x’
SI on Rs. x for 8 years at 3% p.a. = x × 8 × 0.03 =
0.24 x
CI = [ x (1+ 0.03)8 –x]
= (1.03)8 × – x
= 1.266770 x
= 0.266770x
According to question, 0.26677 x- 0.24 x = 267.7
0.02677 x = 267.7
x = 267.7/0.02677
x =Rs. 10,000,
Example 17
Find the principal amount that will
become Rs. 16,000 in 9 years if
money can be deposited at 2% p.a.
compounded semi-annually.
Example 17
A =16,000, t = 9, r = 0.02, P =?
i = 0.02/2 = 0.01
n = 2 × 9 = 18
A = P (1 + i) n
16000 = P (1 + 0.01) 18
P = 16000/(1.01)18
P = 16000/ 1.19614748
P = Rs.13,376.28.
Example 18
If interest is compounded continuously
at an annual rate of 5%, how long will
it take a principal to double itself?
Example 18
P = P,A = 2P, r = 0.05, t =?
A = Pe rt
2P = P e 0.05t
e =2
0.05t
0.05 t log e = Log 2
(log e =0.4343)
0.05 (0.4343)t = 0.301
t=
0.301/0.021715
t = 13.86
years
14 years
(approx.).
Example 19
• If interest is compounded
continuously, at what annual rate
will Rs. 3,000 amount to Rs.
3,00,000 in 25 years?
Example 19
• P = 3,000,A = 3,00,000,t = 25, r =?
A = Pert
300000 = 3000 e25r
e25r =300000/3000 =
100
25 r log e = log 100
25 (0.4343)r = 2(log e
=0.4343)
r = 2/10.8575
r = 0.1842044
r = 18.42 % (approx.).
Example 20
Mr. Arvind deposited Rs. 20,000 in a
bank savings account for 3 years.
Bank pays 6% p.a. compounded
semi-annually for the first year, 12%
p.a. compounded quarterly for the
second year and 13% per annum
compounded continuously for the
third year. Find compound amount in
his bank account at the end of 3
years.
Example 20
P =20,000,A=?
Amount at the end of 3 years = 20000 (1
+ 0.06/2)2 (1 + 0.12/4)4 (e0.13)
A = 20000 (1.03)2 (1.03)4
(e0.13)
A = 20000 (1.03)6 (e0.13)
A = 20000 (1.19405) (1.13882) (Using
ex value table)
A = Rs. 27,196.16.
