Simple & Compound Interest Study

Material

SIMPLE AND COMPOUND INTEREST

Let the sum of money be `.P. So, A=3P and
S.I. = A - P = 3P - P = 2P
INTEREST
R=25%
Interest is the fixed amount paid on borrowed
100×S.I. 100×2P
money. / T= = = 8 years
P×R P×25
The sum lent is called the Principal.
The sum of the principal and interest is called the
Example 3:
Amount.
Interest is of two kinds: What rate per cent annum will produce `250 as
(i) Simple interest (ii) Compound interest
simple interest on `6000 in 2.5 years
(i) Simple interest: When interest is calculated on the
original principal for any length of time, it is called Solution:
simple interest. P=`6000; Time (T) = 2.5 years; S.I. =`250
Principal ×Time ×Rate
 Simple interest = / Rate =
S.I.×100 250×100
= 6000 ×2.5 =
10 5 2
= 3= 1 3 %
100 P×T 6
P×R×T
i.e. S.I. =
100
 Amount = Principal + Interest Example 4:
PRT RT To buy furniture for a new apartment,
i.e. A=P+I=P+ =P 1+
100 100 Sylvia Chang borrowed `5000 at 11% simple
100×S.I.
 Principal(P) = interest for 11 months. How much interest will
R×T
100×S.I. she pay?
 Rate(R) =
T×P Solution:
100×S.I.
 Time(T)= From the formula, I = Prt, with P = 5000,
P×R
r=.11, and t = 11/12(in years). The total
 If rate of simple interest differs from year to
interest she will pay is
year, then
R1+R2+R3+⋯ I=5000(.11) (11/12) =504.17
S.I.=P×
100 Or `504.17
(ii) Compound interest: Money is said to be lent at
Example 1: compound interest when at the end of a year or other
Find the amount to be paid back on a loan of fixed period, the interest that has become due is not
Find the amount to be paid back on a loan of paid to the lender, but is added to the sum lent, and the
`18,000 at 5.5% per annum for 3 years amount thus obtained becomes the principal in the next
year or period. The process is repeated until the
Solution:
amount for the last period has been found. Hence,
P=`18000, R=5.5%, T=3 years When the interest charged after a certain specified time
𝑃×R×T 18000 ×5.5×3 period is added to form new principal for the next time
S.I. = 100
= 100
= Rs.2970
period, the interest is said to be compounded and the
Amount = P + I = 18000 + 2970 = Rs.20970
total interest accurse is compounded and the total
interest accrued is compound interest.
Example 2: 𝑟 𝑛
 C.I. = p 1 + 100 −1 ;
In how many years will a sum of money triple
𝑟 𝑛
itself, at 25% per annum simple interest.  Amount(A) = P 1 + 100
Where n is number of time period.
Solution:

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 Simple & Compound Interest Study
Material

 If rate of compound interest differs from year to 10920 .25 0.9 𝑛 20.9 𝑛
= 1+ = = 436.81/400
year, then 10000 20 20
1 𝑟 2𝑟 𝑟
3 20.9 𝑛 20.9 𝑛 20.9 𝑛
Amount = P 1 + 100 1 + 100 1 + 100 ..... = =
20 20 20

Hence `10000 will become `10920.25 in 2

years at 4.5%.
Example 5:  Compound interest – when interest is
If `60000 amounts to `68694 in 2 years then completed annually but time is in fraction
𝑝
If time = t𝑞 years, then
find the rate of interest.
𝑝
Solution: 𝑟 𝑡 𝑟
𝑞
A=P 1 + 100
Given: A = `68694
100

P = `60000
n = 2 years Example 7:
r=? Find the compound interest on ₹8000 at 15%
𝑟 𝑛 per annum for 2 year 4 months, compound
/ A=P 1+ 100
annually.
𝑟 2
/ 68694 = 60000 1 + Solution:
100
2 4 1
68694 r Time = 2 years 4 months = 212 years = 23years
 = 1+
60000 100 2 1
×15
Amount = ` 8000
15
11449 r 2 1 + 100 1 + 3100
 = 1+
10000 100
=` 8000 × 20 × 20 × 20 = `11109
23 23 21
r 11449
 1+ = = 1.1449
100 10000
r
/ C.I. = ` (11109 - 8000) = `3109
 1+ = 1.07
100  Compound interest – when interest is calculated
𝑟
 = 1.07 – 1 = 0.07 half-yearly
100
/ r = 0.07× 100 = 7% Since r is calculated half-yearly therefore the rate
per cent will become half and the time will become
twice, i.e.,
Example 6: 𝑟
Rate per cent when interest is paid half-yearly = %
In how many years, the sum of ₹10000 will 2
and time = 2×time given in years
become `10920.25 if the rate of compound
Hence,
interest is 4.5% per annum? 𝑟 2𝑛
A=P 1 +
Solution: 2×100

A = `10920.25
Example 8:
P =`10000
What will be the compound interest on `4000
Rate of interest = 4.5%
in 4 years at 8 per cent annum. If the interest is
Time (n) = ?
n calculated half-yearly.
r
/ A= P 1 + Solution:
100
4.5 𝑛 Given: P = Rs.4000, r = 8%, n = 4years
/ 10920.25 = 10000 1 + 100 Since interest is calculated half-yearly,
therefore ,
8
r = 2 % = 4% and n = 4×2 = 8 half years

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 Simple & Compound Interest Study
Material

4 8 26 8 S.I. r1
/ A=4000 1 + 100 =4000× by = r i
25 C.I. 100 1+ −1
= 4000× 1.3685 = 5474.2762 100

Amount = `5474.28
Example 10:
/ Interest = Amount - Principal The difference between compound interest and
= `5474.28 - `4000 = `1474.28 simple interest on a certain amount of money at
 Compound Interest-when interest is 5% per annum for 2 years is `15. Find the sum:
calculated quarterly
Since 1 year has 4 quarters, therefore rate of (a) `4500 (b) `7500
1
interest will become 4th of the rate of interest (c) `5000 (d) `6000
per annum, and the time period will be 4 times Solution:
the time given in years
(d) Let the sum be `100.
Hence, for quaterly interest
100×5×2
r/4
A=P 1 + 100
4×n
= P 1 + 400
r 4n
Therefore, SI= 100
= `10
5 2
and CI=100 1 + 100 - 100
Example 9: 21×21 41
= 100× 20×20 − 100 = `
4
Find the compound interest on `25625 for 12 41 1
Difference of CI and SI = 4
− 10=4
months at 16% per annum, compound 1
quaterly. If the difference is , the sum = 100
4
Solution:  If the difference is `15, the sum
Principal(P)= `25625 = 400× 15 =Rs.6000
16
Rate(r) = 16% = % = 4%
4
Time = 12 months = 4 quaters  POPULATION FORMULA
4 The original population of a town is P and the
4 26 4
A = 25625 1 + = 25625 annual increase is R%, then the population in
100 25
26 26 26 26 𝑅 𝑛
25625× × × × =₹29977.62 years is p 100
and if the annual decrease is P
25 25 25 25
𝑅 𝑛
C.I. =A-P = 29977.62-25625 = `4352.62 1 + 100 R%, then the population in a year is
 Difference between compound Interest and given by a change of sign in the formula i.e
𝑅 𝑛
Simple Interest P 1 − 100
When T=2
R 2
(i) C.I.-S.I. = P Example 11:
100
R×S.I. If the annual increase in the population of a
(ii) C.I.-S.I. =
2×100 town is 4% and the present population is
When T=3
15625 what will be the population in 3 years.
PR 2 300×R
(i) C.I.-S.I. = Solution:
10 4 100
2 4 3
S.I. R R 15625 1 +
(ii) C.I.-S.I. = +3 100
3 100 100 Required population: 15625(1.04)3=17576
When C.I. is compound annually, the ratio of
S.I. to C.I. at the same rate per annum and for NOTE:
the same period is given

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 Simple & Compound Interest Study
Material

 A certain sum is lent out on a certain rate of Thus, the actual amount of compound interest
interest for a certain period. Again the same is
sum is out on x% higher rate of interest for y% `106.09 - `100=`6.09. Now if you earn `6.09
higher period. Then the % increase in S.I
𝑥𝑦 interest on
is given by 𝑥 + 𝑦 + 100 %
`100 in 1 year with annual compounding, your
 P is lent out at the rate of R1% and P2 is lent
out at the rate of R2%. Then over all rate of rate is 6.09/100=.0609=6.09%
interest will be Thus, the effective rate is re = 6.09%
P 1 R 1 +P 2 P 2
R=
P 1 +P 2 NOTE:
1
 part of the principal is lent out on R1% rate In the preceding example we found the effective
𝑥1
of interest, rate by dividing compound interest for 1 year by
1 the original principal. The same thing can be
 𝑥2
part of the principal is lent out on R2% rate
done with any principal P and rate r
of interest,....., compounded m times per year.
1
 𝑥𝑛
part on Rn% rate of interest. The over all compound interest
Effective rate =
principal
rate of interest on whole sum is equal to
compound amont −principal
1 1 1 r e=
× 𝑅1 + × 𝑅2 + ⋯ + × 𝑅𝑛 principal
𝑥1 𝑥2 𝑥𝑛 𝑟 𝑚
𝑟 𝑚 𝑃 1+ −1
𝑃 1+ −𝑃 𝑚
𝑚
= =
𝑃 𝑃
𝑟 𝑚
EFFECTIVE RATE =re= 1 + 𝑚
−1

If `1 is deposited at 4% compounded quaterly,

a calculator can be used to find that at the end of
Example 13:
A bank pays interest of 4.9% compounded
one year, the compound amount is ` 1.0406, an monthly. Find the effective rate.
increase of 4.06% over the original `1. The Solution:
Use the formula given above with r=.049 and
actual in the money is somewhat higher than the m= 12.
stated increase of 4%. To differentiate between .049 12
these two numbers, 4% is called the nominal or The effective rate is re = 1 + −1
12
stated rate of interest, while 4.06% is called the =1.050115575-1=.0501 or 5.01%
effective rate. To avoid confusion between stated
 Present worth of `p due n years hence
rates and effective rates, we shall continue to use r
p
for the stated rate and we will use re for the Present worth= r n
effective rate. 1+
100
 Equal annual instalement to pay the borrowed
Example 12: amount
Find the effective rate corresponding to a Let the value of each instalement = `x
stated rate of 6% compound semiannually. Rate = r% and time = n years
Solution: Then, Borrowed Amount
A calculator shows that `100 at 6% =
x
+
x
+.....+
x
1+
r r 2 r n
100 1+ 1+
compounded semiannually will grow to 100 100

.06 2
A=100 1 + 2
= 100(1.03)2=$ 106.09
Example 14:

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 Simple & Compound Interest Study
Material

Subash purchased a refrigerator on the terms Let the sum be `x and the of compound interest
that he is required to pay `1,500 cash down be r% per annum; then
2 2
payment followed by `1,020 at the end of first 9x =x 1 + 100
𝑟
or 9 = 1 + 100
𝑟

𝑟 𝑟
year, `1,003 at the end of second year and `990 Or, 3=1+100 ; or,100 = 2/ r = 200%
at the end of third year. Interest is charged at Short-cut method:
the rate of 10% per annum. Calculate the cash The general formula of compound interest can
price: be changed to the following form:
Solution: If a certain sum becomes ‘m’ times, the rate of
1
Cash down payment = `1500 compound interest is equal to 100 𝑚 𝑡 −1
1
In this case, r = 100 9 𝑡 −1
Let `x becomes `1020 at the end of first year.
=100(3-1) = 200%
10
Then, 1020 = x 1 + 100
1020×100
or x = = `927.27 Example 17:
110
2
The simple interest on a certain sum of money
10
Similarly, 1003 = y 1 + at 4% per annum for 4 yrs is ₹80 more than
100
1003×20×20
the interest on the same sum for 3 yrs at 5%
or y= = `828.92 per annum. Find the sum.
22×22
990×20×20
and z = = `743.80
22×22×22 Solution
Hence, CP = 1500+927.27+828.92+743.80
Let the sum be `x, then at 4% rate for 4 yrs the
= 3999.99 or `4000 simple interest
x×4×4 4𝑥
= =`
Example 15: 100 25

The difference between the interest received At 5% rate for 3 yrs the simple interest
= `20
𝑥×5×3 3𝑥
from two different banks on `500 for 2 yrs is = 100
4𝑥 3𝑥
Now, we have,25 - 20 = 80
`2.5. Find the difference between their rates.
/ x= `8000
16𝑥−15𝑥
Solution: Or = 80
100
500×2×r 1
I1 = = 10r1 Altornate Method:
100
500×2×r 2 For this type of question sum
I2 = = 10r2 100
100 Sum=difference ×
I1 – I2 = 10r1 - 10r2 = 2.5 r 2 t 1 =r 2 t 2
2.5 80×100
Or, r1 – r2 = 10
= 0.25% = `8000
4×4−3×5
Short-cut method:
When t1 = t2, Example 18:
𝐼 ×100
𝑑
(r1 – r2) = 𝑠𝑢𝑚 =
2.5×100
= 0.25% Some amount out of `7000 was lent at 6% per
×𝑡 500×2
annum and the remaining at 4% per annum. If
Example 16: the total simple interest from both the fractions
At what rate per cent compound interest does a in 5 yrs was `1600, find the sum lent at 6% per
sum of money becomes nine-fold in 2 years? annum.
Solution: Solution:
Suppose `x was lent at 6% per annum.

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 Simple & Compound Interest Study
Material

x×6×5 (7000−x)×4×5
Thus, + = 1600
100 100
3𝑥 7000 −𝑥 Example 20:
Or,10 + = 1600
5
Find the compound interest on `18,750 in 2 yrs
Or, 3x+14000-2x = 16000
/ x=16000-14000 = Rs.2000 the rate of interest being 4% for the first year
By Method of Alligation: Overall rate of and 8% for the second year.
interest Solution:
1600 −100 32 After first year the amount
= 5×7000
= 7
%
4 104
=18750 1 + = 18750
100 100
nd 104 108
After 2 year the amount = 18750
4% 100 100
6% 26 27
=18750 = 21060
25 25
32/7% / CI = 21060-18,750 = `2310.

10/7%
4/7%

GK Study Materials PDF Download

/ratio of two amounts = 2:5
× 2 = `2000
7000
/amount lent at 6% = All subject Study Materials PDF Download
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Example 19: 2018 Current Affairs Download – PDF Download

As n amount of money grows upto ₹4840 in 2
yrs and upto `5324 in 3 yrs on compound
interest. Find the rate percent Whatsapp Group Click Here
Solution:
We have,
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P+CI of 3 yrs = `5324.......(i)

P+CI of 2 yrs = `4840.......(ii)

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Subtracting (ii) from (i), we get
CI of 3rd year = 5324-4840 = `484. Follow US on Twitter - Examsdaily
Thus, the CI calculated in the third
year which is `484 is basically the amount of
interest on the amount generated after 2 years
which is `4840.
Alternate method:
Difference of amount after n yrs and n + 1 yrs × 100
Amount after n yrs
In this, n=2.
Difference of amount after 2 yrs and 3yrs ×100
/ rate =
Amount after 2 yrs
(5324−4840) 484×100
= × 100 = = 10%
4840 4840