Calculating Compound Interest

When we deposit some money in a bank, the extra money paid by the bank is called Interest.

We know how to calculate simple interest from the formula: S.I.= P x T x R / 100

However, the interest paid by the banks or post offices and charged by the money lenders is not of this kind. The interest paid or charged in such cases is compound interest.

Let us know the method of finding compound interest by taking an example.

Question:

Deepak borrowed Rs 16000 from Manish at a rate of 5% per annum for two years. Can you calculate the amount paid by Deepak as compound interest?

Example:

Javed invested Rs 15000 for three years in a bank at the rate of 10% per annum compounded annually. On the other hand, Sujata invested the same sum in some other bank at the same rate for the same duration but on simple interest. Who will earn more interest?

Solution:

It is given that,

Principal = Rs 15000

Rate of interest = 10% per annum

Time = 3 years

Let us first calculate compound interest.

Interest for the 1st year

= Rs 1500

Amount at the end of 1st year

= Rs 15000 + Rs 1500

= Rs 16500

Interest for 2nd year

= Rs 1650

Amount at the end of 2nd year

= Rs 16500 + Rs 1650

= Rs 18150

Interest for 3rd year

= Rs 1815

\ Total interest received by Javed after 3 years

= Rs 1500 + Rs 1650 + Rs 1815

= Rs 4965

Simple interest received by Sujata after 3 years

= Rs 4500

Thus, Javed received more interest than Sujata.