Calculating Compound Interest
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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.
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.
Last edited by Sujith on Fri Jul 02, 2010 6:27 pm; edited 2 times in total (Reason for editing : Making the text attractive is one way to get more views. I have done it for this one but you'll have to edit the rest.)
rajathadri- LSF Member
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