Today, we are going to discuss a very interesting topic Simple and Compound interest.
It deals with the money matters. By the end of it, we shall be familiar with the basic formulas used for the calculation of simple and compound interest and their practical applications.
Various terms to be used along with their general representation are:
Denoted by I.
SI = Pnr
A=P+SI
OR
The amount at the end of year will become principal for the next year and so on.
Let P be principal borrowed at the beginning of period 1.
Amount at end of period n=1 is
A= P (1+r/100)
Then,
New Principal at the beginning of period 2 will be A i.e. P (1+r/100) = P*R where R=(1+r/100).
As can be seen from table,
Various terms to be used along with their general representation are:
INTEREST
It is money paid by borrower for using the lender's money for a specified period of time.Denoted by I.
PRINCIPAL
The original sum borrowed. Denoted by P.TIME
Time period for which the money is borrowed. Denoted by nRATE OF INTEREST
Rate at which interest is calculated on the original sum. Denoted by r.AMOUNT
Sum of Principal plus Interest. Denoted by A.SIMPLE INTEREST
The interest calculated every year on original principal, i.e. the sum at the beginning of first year. Denoted by SI.SI = Pnr
A=P+SI
COMPOUND INTEREST
The interest is added to the principal at the end of each period to arrive at the new principal for the next period.OR
The amount at the end of year will become principal for the next year and so on.
Let P be principal borrowed at the beginning of period 1.
Amount at end of period n=1 is
A= P (1+r/100)
Then,
New Principal at the beginning of period 2 will be A i.e. P (1+r/100) = P*R where R=(1+r/100).
Lets’ checkout the applicability of the above concept with an example
Consider P at the beginning of year of Rs 100 and r=10% p.a. Now, for the next three years the calculation of simple and compound interest is as follows:
Under Simple
Interest
|
Under compound
interest
|
|||||||
Year
|
Principal at
beginning of year
|
Interest for the
year
|
Interest till the
end of the year
|
Amount at the end of
the year
|
Principal at the
beginning of the year
|
Interest for the
year
|
Interest till the
end of the year
|
Amount at the end of
the year
|
1
|
100
|
10
|
10
|
110
|
100
|
10
|
10
|
110
|
2
|
100
|
10
|
20
|
120
|
110
|
11
|
21
|
121
|
3
|
100
|
10
|
30
|
130
|
121
|
12.1
|
33.1
|
133.1
|
UNDER SIMPLE
INTEREST
|
UNDER COMPOUND
INTEREST
|
P
is same for every year
|
A
at the end of every year = P for next year
|
I
is same for every year
|
I
is different for each year.
|
Hope you are clear
with the ‘interesting aspect of this topic!
