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SIMPLE AND COMPOUND INTEREST

Interest is the money that paid for the use of
a certain amount.
The amount borrowed is called the Principal.
The sum of interest and principal is called
the Amount.
SIMPLE INTEREST
If the interest is calculated on original
Principal for a certain period is called the
Simple Interest (S.I.). Simple Interest will be the
same for all the years.
If P is the principal, R is the rate of interest,
T is the time and S.I. the simple interest, then
PTR
Simple Interest =
100
TR
Amount = P
(
1+
)
100
e.g: Find the Simple Interest obtained on an
amount of Rs.16800 at the rate of 4
1

2
p.c.p.a. for a period of 3 years
Sol: Here P = Rs.16800, T = 3 years
R = 4
1

2
% =
9

2
%
16800 3 9
Simple Interest = = Rs. 2268
2 100
e.g: What principal will amount to Rs.5700 at
4% per annum in 3
1

2
years?
TR
Sol: Amount = P
(
1 +
)
100
7 4
P
(
1 +
)
= 5700
2 100
5700 2 100
P = = Rs. 5000
228
Shortcut: For one year, rate of interest is 4%
and for 3
1

2
years it is 4 3
1

2
= 14%
The amount will become 114%.
If 114% money = 5700,
100
then 100% money = 5700
114
= Rs. 5000
COMPOUND INTEREST
When the interest that has become due at
the end of a period is not paid to the lender, but
is added to the sum lent which then becomes
the principal for the next period, then the money
is said to be lent at Compound Interest. Thus
the amount at the end of period becomes the
principal for the next period.
If A is the amount, C.I. is the Compound
Interest, P is the principal, R is the rate, and T
is the time, then
R
T
A = P
[
1+
]
100
R
T
C.I. = P
[
1 +
]
P
100
e.g: What is the Compound Interest accrued on
an amount of Rs. 8000 at the rate of
5 p.c.p.a. at the end of 3 years?
R
T
Sol: C.I. = P
[
1 +
]
P
100
5
3
C.I. = 8000
[
1 +
]
8000
100
105 105 105

[
8000
]
8000
100 100 100
= Rs.1261
Shortcut: Amount = 105% of 105%
of 105% of 8000 = Rs. 9261
C.I. = 9261 8000 = Rs.1261
Note: If the Interest is paid half yearly, time
is doubled and the rate is halved.
If the Interest is paid quarterly, time
becomes 4 times and the rate becomes
one -fourth
Difference between Simple
and Compound Interest
It can be calculated by the following
formulae.
For one year: There is no difference.
P R
2
For 2 years: Difference =
100
2
(300 + R) P R
2
For 3 years: Difference =
100
3
If the rate of interests are 5% and 10%, the
following formulae can be used
@ 5%
Difference
61
= P
8000
@ 10% Difference =
31
P
1000
e.g: What is the differ-
ence between
Simple and Compound Interest on
Rs.42800 for two years at 5% rate?
P R
2
42800 25
Difference = = Rs.107
100
2
10000
e.g: On what sum does the difference between
Simple and Compound Interest for 3 years
at 10% rate will be Rs.403?
P 31 P 31
Sol: Difference = 403 =
1000 1000
403 1000
P = Rs. 13000
31
1. A certain sum of money becomes Rs.1250
in a span of 5 years and further to
Rs.1700 in the span of 8 years at the
same rate of Simple Interest. What
would be the amount at the end of 12
years?
Sol: Interest for 3 years (8 - 5 years)
= 1700 - 1250 = Rs.450
5
Interest for 5 years = 450
3
= Rs.750
Principal = 1250 - 750 = Rs.500
12
Interest for 12 years = 450 = Rs.1800
3
Amount after 12 years = 500 + 1800
= Rs.2300
2. An amount of Rs.15600 is to be divided into
two parts such that the Simple Interest on
the first part at 8% p.a. for 3 years is equal to
the Simple Interest on the second part at 6%
p.a. for 4 years. What is the difference
between the two parts?
Sol: Let the first part be Rs.x and 2
nd
will be
Rs.(15600 - x)
x 8 3 (15600 - x) 6 4
=
100 100
2x = 15600
15600
x = = Rs.7800
2
Both parts are equal so there is no difference
Short cut: If we can observe 8% for 3 years on
1
st
part is 24% and 6% for 4 years on 2
nd
part
is also 24%. Interest on both parts are equal
means both 1
st
and 2
nd
parts are equal.
3. A sum of money amounts to Rs.1488 in 3
years at a Simple Interest. If the rate of
interest is raised by 25%, the sum amounts
to Rs.1560 during the same period. Find the
sum and the rate of interest.
Sol: Rs.1560 - Rs.1488 = Rs.72.
25% of interest = Rs.36
100
100% interest = 72 = Rs.288
25
The interest for 3 years = Rs.288.
Principal = 1488 - 288 = Rs.1200
288 100
Rate = = 8%
1200 3
4. A sum of money invested at Compound
Interest amounts to Rs.650 at the end of first
year and Rs.676 at the end of second year.
Find the rate of interest.
Sol: Interest in 2
nd
year = 676 - 650 = Rs.26
As this is Compound Interest, 2
nd
year
interest is calculated on1
st
year amount
26
Rate of interest = 100 = 4%
650
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G.S. Giridhar
QUANTITATIVE APTITUDE
1. What would be the Simple Interest obtained
on an amount of Rs. 52580 at the rate of 4
p.c.p.a. after 3 years?
A) Rs.6209.60 B) Rs.6102.70
C) Rs.6309.60 D) Rs.5986.40
E) None of these
2. The Simple Interest accrued on an amount
of Rs.12450 at the end of 6 years is
Rs. 8964. What is the rate of interest?
A) 9 B) 12 C) 14 D) 10
E) None of these
3. Find the Simple Interest on Rs.8000 at 3%
per annum from August 2
nd
to October 14
th
in the same year.
A) Rs.36 B) Rs.42 C) Rs.56 D) Rs.48
E) None of these
4. On what sum does the difference between
Simple Interest and Compound Interest for
3 years at 5% rate be Rs.427?
A) Rs.12000 B) Rs.24000
C) Rs.56000 D) Rs.32000
E) None of these
5. A man deposits Rs.5600 in a bank at 5%
annual interest. After 6 months he
withdraws Rs.4400 together with interest
and after 6 months the remaining money.
How much does he get as interest?
A) Rs.140 B) Rs.210
C) Rs.170 D) Rs.190 E) None
6. A sum of money will become Rs.4600 in 5
years and Rs.4960 in 8 years at a certain
rate of Simple Interest. Find the rate of
Interest.
A) 3% B) 5% C) 8% D) 4%
E) None of these
ANSWERS: 1-C; 2-B; 3-D; 4-C; 5-C; 6-A.
EXPLANATIONS
S.I. 100
2. R =
P T
8964 100
R = = 12%
12450 6
3. Time from August 2
nd
to October 14
th
= 29 days of August + 30 days of
September and 14 days of October
73
= 73 days = years
365
1
= years
5
1
8000 3
5
S.I. = = Rs.48
100
P 61
4. D = P = Rs.56000
8000
5. S.I. on Rs.5600 for 6 months =
1
5600 5
2
= = Rs.140
100
He withdrew Rs.4400 together with interest,
the remaining amount
= 5600 - 4400 = Rs.1200
1
S.I. on Rs.1200 at the rate of 5% for year
2
1
1200 5
2
= = Rs.30
100
Total interest = 140 + 30 = Rs.170
6. Amount after 5 years = Rs.4600
Amount after 8 years = Rs.4960
Difference = 360, which is interest for 3 years
5
Interest for 5 years = 360 = 600
3
Principal = 4600 - 600 = 4000
S.I. 100 600 100
R = = = 3%.
P T 4000 5
(Writer - Director, RACE Institute, Hyderabad)
How much does he get as interest?

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