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BM - Interest

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21 views4 pages

BM - Interest

Uploaded by

rafidmagnus2004
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Army Institute of Business Administration, Savar

Topic: Interest
Course teacher: Lec. Md Dar Un Nayem Aurnob
Interest
Most times when you borrow money from someone or loan money to someone, the money paid
back is more than the money that was taken, and, sometimes, the extra money may increase
over time. The extra money made is called interest.
Interest is a fee paid on borrowed money or on a loan.
The term used to describe the borrowed money or the loan is called the principal amount
(P). If you borrow money from someone or loan to someone, the charges on the principal
amount are called the interest rate (R).
There are two types of interest:
• Simple Interest
• Compound Interest
Simple Interest is used to find the interest on a principal amount. To find the simple interest,
you will need to know the principal amount, the interest rate, and the time in which the money
is to be paid back or returned.
Simple Interest Formula
𝐼 =𝑃×𝑅×𝑇
Where
P= principal amount
R= interest rate
T= time duration (in years)

Example 1:
Rahim takes a loan of Tk 10000 from a bank for a period of 1 year. The rate of interest is
10% per annum. Find the interest and the amount he has to pay at the end of a year.
Solution:
Here, the loan sum = P = Tk 10000
Rate of interest per year = R = 10% = 0.1
Time for which it is borrowed = T = 1 year
Thus, simple interest for a year, SI = (P × R ×T) = (10000 × 0.1 ×1) = Tk 1000
Amount that Rahim has to pay to the bank at the end of the year = Principal + Interest = 10000
+ 1000 = Tk 11,000
Example 2:
Nira borrowed Tk 50,000 for 3 years at the rate of 3.5% per annum. Find the interest
accumulated at the end of 3 years.
Solution:
P = Tk 50,000
R = 3.5% = 0.035
T = 3 years
SI = (P × R ×T) = (50,000× 3.5 ×3) = Tk 5250
Practice Question:
A sum fetched a total simple interest of Tk 4016.25 at the rate of 9% per annum in 5
years. What is the sum?
Compound Interest
When you put money in a savings account and you leave it there for a long time, you find out
that each year your money is increased with a particular interest rate. The interest will continue
to be added over time provided the money stays in the bank. This interest gathered over time
is what is called compound interest. It is also described as interest on interest because new
interest is always added.
Compound interest formula
𝐴 = 𝑃(1 + 𝑟)𝑡
Where
A= Final amount
P= Principal amount
r= interest rate
t= time (in years)
Compound interest formula (extended)
𝑟
𝐴 = 𝑃(1 + )𝑛𝑡
𝑛
Where
A= Final amount
If compounded annually, n = 1
P= Principal amount
If compounded semi-annually, n = 2
r= interest rate
If compounded quarterly, n = 4
If compounded monthly, n = 12
t= time (in years)
n= Number of times interest is compounded per year
Compound Interest Word Problems
Question 1: A sum of Tk.10000 is borrowed by Akash for 2 years at an interest
of 10% compounded annually. Find the compound interest and amount he has to pay at the end
of 2 years.
Question 2: What is the compound interest on Tk. 5000 for 2 years at 10% per annum
compounded annually?
Question 3: What is the compound interest to be paid on a loan of Tk. 2000 for 3/2 years
at 10% per annum compounded half-yearly?
Question 4: What is the difference between the compound interests on Tk. 5000 for one and
half years at 4% per annum compounded yearly and half-yearly?

Some more related problems:


1. Increase or Decrease in Population
A town had 10,000 residents in 2000. Its population declines at a rate of 10% per annum. What
will be its total population in 2005?
Solution:
The population of the town decreases by 10% every year. Thus, it has a new population every
year. So the population for the next year is calculated on the current year population. For the
decrease, we have the formula A = P(1 – R/100)n
Therefore, the population at the end of 5 years = 10000(1 – 10/100)5
= 10000(1 – 0.1)5 = 10000 x 0.95 = 5904 (Approx.)
2. The Growth of Bacteria
The count of a certain breed of bacteria was found to increase at the rate of 2% per hour. Find
the bacteria at the end of 2 hours if the count was initially 600000.
Solution:
Since the population of bacteria increases at the rate of 2% per hour, we use the formula
A = P(1 + R/100)n
Thus, the population at the end of 2 hours = 600000(1 + 2/100)2
= 600000(1 + 0.02)2
= 600000(1.02)2
= 624240
3. Rise or Depreciation in the Value of an Item
The price of a radio is Tk. 1400 and it depreciates by 8% per month. Find its value after 3
months.
Solution:
For the depreciation, we have the formula A = P(1 – R/100)n
Thus, the price of the radio after 3 months = 1400(1 – 8/100)3
= 1400(1 – 0.08)3
= 1400(0.92)3
= Tk. 1090 (Approx.)

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