Question

What is the difference between simple interest
on ₹15000 at 10 per annum for 3.5 years
and simple interest on F 5000 at 5.5%
per annum
for 2.5 years?
​

Answer 1

Answer:

Money is not free to borrow. People can always find a use for money, so it costs to borrow money. Different places charge different amounts at different times! It is called Interest. This lesson explains the concept of Simple Interest and Compound Interest. We will develop a basic understanding of these two different types of interests, their uses and properties.

Simple Interest (SI)

It is an easy and quick method of calculating an interest charge on a loan. Simple interest (S.I.) is determined by multiplying the principal (P) with rate of interest (R) and time period (T).

S.I.= \dfrac{P \times R \times T}{100}

Example: Henry borrowed Rs. 5000 for 4 years at an interest rate of 5% from a bank. How much of interest is that?

We know,

S.I.=\dfrac{P \times R \times T}{100}

Here P= Rs. 5000, R= 5%, T= 4 years

So,

I=\dfrac{5000 \times 5 \times 4}{100}=Rs. 1000

Ans: Henry has to pay Rs. 1000 as interest.

Clearly, in S.I. the principal remains constant throughout. But the above method is not generally used in day to day financial system like banks, insurance companies, post offices. They use a different method of computing interest. In this method the lender and the borrower agree to fix up a certain time interval, say a year or half a year or a quarter of a year for the computation of the interest and the amount. At the end of the first interval, the interest is computed and is added to the original principal. The amount obtained is added to the second interval of time. The amount of this principal at the end of the second interval of time is taken as the principal of the third interval of time and so on. At the end of the certain specified period, the difference between the amount and money borrowed, that is, the original principal is computed and it is called the compound interest. Let us simplify it.