calculating simple interest and compound interest
TRANSCRIPT
Calculating Simple interest and compound interest
Module Objectives
• An introduction to the concept of interest on money.
• Calculating interest- Different types of interest: simple and compound
• Exercise your newfound knowledge!
Interest
• Raju needs money • Bank and Raju write down :
How much ?=Rs.100Time being borrwed for ?=2 year
• Bank calculates the amount Raju has to return after 2 years
• For this service that bank gave to raju, it charges a fee. This fee is nothing but interest
Types of interest
1. Simple2. compound
Simple Interest
0 years
After 1 year After 2 years
Simple InterestRecap the previous example. Raju borrowed:-Rs 100-For 2 years-At a rate of 10%
Thus, at the end of 2 years, for borrowing Rs 100, Raju will owe the bank Rs. 120
TIME Amount borrowed
Interest to be paid
Total that raju has to pay
After 1 year
After 2 years 100
100
10
10 10
10+10=20
The math of itPrinciple = Rs. 100Time = 2 yearsRate of interest = 10 % per year
Total interest = (interest for year 1) + (interest for year 2) = (100x0.1) + (100x0.1) =10 + 10 = Rs. 20
An easier way to do this -> use formulaSimple interest (SI)= (PTR)/100
Ex. SI = (100x2x10)/100
Let’s change the numbers a bit
Amount borrowed: 100Time: 3 yearsInterest rate: 15%
Thus, at the end of 3 years, Raju will have to return Rs 145 for having borrowed Rs. 100
TIME Amount borrowed
Interest to be paid
Total interest that Raju has to pay
After 1 year
After 2 years 100
100
15
15 15
15+15 = 30
After 3 years 100 15 15+15+15= 45
Exercise: Simple Interest
1. Principle= 2000, Rate of interest= 12% annual, Time= 1 years. What is SI and final amount to be paid ?
2. Principle=2000, Rate of interest=12% annual, Time= 1.5 year. What is SI and final amount to be paid ?
Compund Interest
• In simple interest, the base or principle stays the same every year, and interest is just calculated on this same principle
• In Compound interest, the base amount changes every year. The base amount for next year will be (principle + this year’s interest)
What I just said means…
• Raju: Principle=Rs. 100 Rate of interest = 10% (compounded annually) Time = 3 years
TIME Amount borrowed
Interest to be paid for that year
Total interest so far
TOTAL:133.1
After 2 years 110
100
11
10 10
11+10=21
After 3 years 121 12.1 12.1+21=33.1
After 1 year
Formula for Compound Interest
P(1 + r)t
Recollect previous example:P= Rs. 100R= 10% = 0.1t=3 yearsThus,Total amount at end of 3 years= 100(1+0.1)3
= 100(1.331) = 133.1
Exercise: Compound Interest
1. Principle= 2000, Rate of interest= 12% annual, Time= 2 years. What is final amount to be paid after 2 years ?
Summary
• There are two ways of calculating interest• In everyday life, compund interest is the way
banks calculate interest.• Simple interest is slow growth-good for you• Compund interest: beware.
Exercises
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