what will be the difference between simple and compound interest at the rate of 8% pa on a sum of ₹3000 after 2 and half years
Answers
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Simple Interest
Interest is the extra money paid by institutions like banks or post offices on money deposited (kept) with them. Interest is also paid by people when they borrow money.
With Simple interest, the interest is calculated on the same amount of money in each time period, and, therefore, the interest earned in each time period is the same. i.e., If the interest on a sum borrowed for certain period is reckoned uniformly, then it is called simple interest.
Let the principal = P, Rate = R% per annum (p.a) and Time = T years.
Example - 1
A sum of Rs 10,000 is borrowed at a rate of interest 15% per annum for 2 years. Find the simple interest on this sum and the amount to be paid at the end of 2 years.
Solution :
On Rs 100, interest charged for 1 year is Rs 15.
So, on Rs 10,000, interest charged =
Interest for 2 years =
Amount to be paid at the end of 2 years = Principal + Interest
Compound Interest
Compound interest is calculated on the principal plus the interest for the previous period. The principal amount increases with every time period, as the interest payable is added to the principal. This means interest is not only earned on the principal, but also on the interest of the previous time periods.
Therefore, the compound interest calculated is more than the simple interest on the same amount of money deposited.
Let us take an example and find the interest year by year. Each year our sum or principal changes.
Calculating Compound Interest
Example - 2
A sum of Rs 20,000 is borrowed Heena for 2 years at an interest of 8% compounded annually. Find the Compound Interest (C.I.) and the amount she has to pay at the end of 2 years.
Aslam asked the teacher whether this means that they should find the interest year by year. The teacher said ‘yes’, asked him to use the following steps :
1. Find the Simple Interest (S.I.) for one year.
Let the principal for the first year be P1. Here, P1 = Rs 20,000