Question

The ratio of difference between compound interest and simple interest and simple interest for 3years

Answer 1

The principle of compounding growth is used extensively in the financial world to transform small savings into a big corpus over time. It’s also the underlying idea behind MBA topics such as time value of money and discounted cash flow (DCF) valuation.

Learn about simple and compound interest concepts as you’ll need them not only for entrance exams but in the real world too, especially after you become rich and famous.

Simple and Compound interest Problems and Solutions

Here is a list of some basic definition and formulas to solve problems on Interest.

Principal: This is the sum of money lent or borrowed.

Interest: This is the extra money paid for taking the money as loan. This is often expressed as a percentage.

Say, the interest is 10% on a loan of Rs. 100. Then the interest in amount is Rs. 10 and at the end of the year, the amount to be paid is Rs. 110.

Time: This is the time period for which the money is lent or the time period in which the money has to be returned with interest.

Simple Interest

As the name implies, the calculation of simple interest is pretty simple. Multiply the principal amount with the number of years and the rate of interest.

Simple Interest Formula:
Simple Interest = Principal * Time * Rate of interest / 100

Abbreviated as SI = PTR/100

Compound Interest

In compound interest, the principal amount with interest after the first unit of time becomes the principal for the next unit.

Say, when compounded annually for 2 years, the principal amount with interest accrued at the end of first year becomes the principal for the second year.

Compound Interest Formula:
Amount = Principal * [1 + Rate of Interest/100]Time period

Abbreviated as Amount = P * [1 + R/100]t, when compounded annually.

Sometimes, the interest is also calculated half-yearly or quarterly.

When compounded semi-annually or half-yearly,

Amount = P[1 + (R/2)/100]2t

When compounded quarterly,

Amount = P[1 + (R/4)/100]4t

Present worth of Principal P due t years hence is given by:

P/[1+ R/100]t

Sample problems and solutions

Let us work on some examples to understand the concepts and the differences.

Problem 1. A sum of Rs. 25000 becomes Rs. 27250 at the end of 3 years when calculated at simple interest. Find the rate of interest.

Solution:

Simple interest = 27250 – 25000 = 2250

Time = 3 years.

SI = PTR / 100 → R = SI * 100 / PT

R = 2250 * 100 / 25000 * 3 → R = 3%.

Problem 2. Find the present worth of Rs. 78000 due in 4 years at 5% interest per year.

Solution:

Amount with interest after 4 years = Rs. 78000

Therefore, simple interest = 78000 – Principal.

Let the principal amount be p.

78000 – p = p*4*5/100 → p=13000

Principal = 78000 – 13000 = Rs. 65000

Problem 3. A certain principal amounts to Rs. 15000 in 2.5 years and to Rs. 16500 in 4 years at the same rate of interest. Find the rate of interest.

Solution:

Amount becomes 15000 in 2.5 years and 16500 in 4 years.

Simple interest for (4-2.5) years = 16500 – 15000

Therefore, SI for 1.5 years = Rs. 1500.

SI for 2.5 years = 1500/1.5 * 2.5 = 2500

Principal amount = 15000 – 2500 = Rs. 12500.

Rate of Interest = 2500 * 100 / 12500 * 2.5 → R = 8%.