Simple Interest

I = Prt
100

I = Interest
P = Principal amount
r = Rate of Interest percentage per time period
t = Time period
 Total Amount Payable

A = P + i = P + Prt
100

A = Total Amount Payable with interest

P = Principal amount
i = Interest
r = Rate of Interest percentage per time period
t = Time period
Q. Mr. A is planning his retirement and
estimates that he needs Rs. 20,000 per
month to survive. If bank fixed deposit
pay interest at 6% per annum, what
amount must he set aside so that he
can survive on the interest?

Here, i = Rs. 20,000 X 12 = Rs. 2,40,000

r = 6% per annum
t = 1 (he needs it every year)
P = ? (to be calculated)
 Here, i = Rs. 20,000 X 12 = Rs. 2,40,000
r = 6% per annum
t = 1 (he needs it every year)
P = ? (to be calculated)

i = Prt P = 100 i
100 rt

P = 100 i = 100 X 2,40,000 = 40,00,000

rt 6 X 1
Q. Mr. A borrow Rs. 2,000 for 3 years at 8% per
annum with the interest paid yearly and the
principal to be returned at the end of 3 years.
What is the payment schedule for 3 years?

i = Prt = Rs. 2,000 X 8 X 1 = Rs. 160

100 100

End of Year 1 = Rs. 160

End of Year 2 = Rs. 160
End of Year 3 = Rs. 160 + Rs. 2,000 = Rs. 2,160
Q. Mr. A borrow Rs. 2,000 for 3 years at 8% per
annum with the interest paid half yearly and the
principal to be returned at the end of 3 years.
What is the payment schedule for 3 years?

i = Prt = Rs. 2,000 X (8/2) X 1 = Rs. 80

100 100
After 06 months = Rs. 80; After 12 months = Rs. 80
After 18 months = Rs. 80; After 24 months = Rs. 80
After 30 months = Rs. 80;
After 36 months = Rs. 80 + Rs. 2,000 = Rs. 2,080
Q. ABC Ltd. takes out a loan of US$ 10,000
at an interest rate of 3% per annum,
repayable in a year. Further, suppose that
at the time of loan, the rupee was 64 to the
dollar and a year later, it stood at 66 to the
dollar. What is the actual interest rate?

Amount Payable = P + i = P + Prt

100
= $ 10,000 + $ 10,000 X 3 X 1
100
= $ 10,000 + $ 300 = $ 10,300
Amount Received = $ 10,000 = Rs. 64 X 10,000 = Rs. 6,40,000
Amount to be Refunded = $ 10,300 = Rs. 66 X 10,300 = Rs. 6,79,800

A = P + Prt r = 100 (A – P)
100 Pt

r = 100 (A – P) = 100 X (679800-640000)

Pt 6,40,000 X 1

r = 100 X 39,800 = 6.22%

6,40,000
COMPOUNDING EFFECT
 Once upon a time there lived a
wealthy king. One day a man
brought to him a new board game
that he had invented. He called the
game ‘chess’.
 The king played the game with the
man and he was so impressed that
he asked him to choose a reward
for himself.
 The man asked for one ashrafi for the first square of
the chess board, 2 ashrafis for the second, 4 for the
third & so on…
 The king found it a very easy reward. And ordered to
give the award to the man, but finally the treasurer
informed that they don’t have that much ashrafi with
them
 CHECK MATE!
If we replace one asharfi with one
grain of rice, the first half of the
chess board needs aprox.
100,000 kg of rice (assuming 25 mg
as the mass of one grain of rice).
India's annual rice output is about
1,200,000 times that amount.
The grains of rice needed for full board is only
264 − 1 (i.e. 18,446,744,073,709,551,615),
weighing 461,168,602,000 metric tons, which
would be a heap of rice larger than Mt. Everest.
This is around 1,000 times the global production
of rice in 2010 (464,000,000 metric tons).
COMPOUNDING IS THE EIGHTH WONDER
- ALBERT EINSTEIN

 Rs.1 lac invested @ 10%

Year Simple interest Compound interest
@ 10% p.a. @ 10% p.a.
1 1,10,000.00 1,10,000.00
2 1,20,000.00 1,21,000.00
3 1,30,000.00 1,33,100.00
4 1,40,000.00 1,46,410.00
5 1,50,000.00 1,61,051.00
20 3,00,000.00 6,72,749.99
25 3,50,000.00 10,83,470.59
30 4,00,000.00 17,44,940.23
 Compound Interest Formula

A = money accumulated after n years, including interest.

P = principal amount (the initial amount you borrow or deposit)
r = annual rate of interest (as a decimal)
n = number of times the interest is compounded per year
t = number of years the amount is deposited or borrowed for.
 THE RULE OF 72
This rule tells how much time is taken to double
your money given the interest rate
@ 9% per year, your money will double
in roughly 8 years (72 / 9 = 8)
This also tells about required rate of return to
double your money given the number of years
To double the money in 6 years, you
need to earn interest @ 12% (72 / 6 = 12)
Similarly there are 114 (triple) or 144
(quadruple) rules to help us.
Q. If I invest Rs. 10,000 today @ 10% p.a.
and not withdraw any amount, how much
will I accumulate after 10 years?

Here, P = Rs. 10,000; r = 10%; n = 10; A = ?

A = P(1 + r)n
= Rs. 10,000 (1 + 0.10)10
= Rs. 10,000 (1.10)10
= Rs. 10,000 X 2.5937
= Rs. 25,937.43
Q. How much amount I need to deposit
in an account in order to get Rs. 50,000
in 4 years time, with the account paying
8% p.a., compounded yearly?
Here, A = Rs. 50,000; r = 8%; n = 4; P = ?
A = P(1 + r)n P = A / (1 + r)n

P = A / (1 + r)n
= Rs. 50,000 /(1 + 0.08)4
= Rs. 50,000 / (1.360489)
= Rs. 36,751.49
Q. Two friends Puia and Sanga, both 30 years old,
discussed about their investment plans. Puia plans to
invest Rs. 1,00,000 at age of 45 for 15 years (i.e. he will
withdraw the money at the age of 60) and expecting a
return of about 12%. His friend Sanga invests Rs. 1,00,000
today at age of 30 years for 30 years (i.e. he will also
withdraw the money at the age of 60) with a similar return
expectation. Calculate return on their investments.

Ans: A = P(1+r)n

Puia: A = P(1+r)n = 1,00,000(1+0.12)15 = 5,47,357

Sanga: A = P(1+r)n 1,00,000(1+0.12)30 = 29,95,992

Q. Mr A, who is in the tax bracket of 30%, made
an investment in a RBI bond yielding a return of
8%. What is his Tax Adjusted Return?

Tax Adjusted Return = Nominal Return X

(1-tax rate)

= 8% (1-0.30)
= 8 X 0.70
= 5.6%
Q. Sailo wants to invest Rs. 1,00,000 in a Bank F.D. for 5
years, earning an interest rate of 8% per annum. During the
period, expected average rate of inflation is 4%. What is
his Real Rate of Interest?

Real Rate of Interest = [(1+r)/(1+p)-1] X 100

r = Rate of Interest
p = Rate of Inflation
RRI = [(1+0.08)/(1+0.04)-1] X 100
= [(1.08)/(1.04)-1] X 100
= [1.0384615-1] X 100
= 0.0384615 X 100 = 3.85%
Q. Consider one offer: “Invest Rs. 1,000
today and get Rs. 20,000 in 20 years”.
Calculate what interest rate was the
scheme actually offering?

P = 1,000 A = 20,000 N = 20 R=?

A = P(1 + r)n (1+r)n = A/P

1+r = (A/P)1/n r = (A/P)1/n - 1
r = (A/P)1/n – 1
= (20,000/1,000)1/20 -1
= (20)1/20 -1
= 1.161586349 – 1
= 0.161586
OR 16.16%
 A = P(1 + r)n

P = A / (1 + r) n

r= (A/P)1/n –1

n = log (A/P)
log (1+r)