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41 viewsDifferent Types of Interest Rates
Types of interest rates
Uploaded by
Arshveer SinghCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
/ 13
ed from banks er ment ther
than
he lender of su; ot
th
TONY lender in geet arom
money Teceives from the
rowed) made for the money
1s, interest is the consideration
borrower for the use of money
or 2 years is Rs. 16, Then “the interest
16” is known as “Interest Rate”. This may
Rs. 100 per annum is Rs. 4”, The statement
annum is Rs. 4” may be written as “The
=Rs. 4” or “interest rate is 4% per annum”.
rate percent. In brief,
Rate of intere it of time = Interest.
st per unit of time = Sa
st on Rs. 100
interest on Rs. 100 for one year
Here 4 is also called rate or
In the example given above
i 8 4
R ees
‘ate of interest per year 200 = 100 .04 or 4%
In general, rate of interest is indicated as percent per annum and is
denoted by r or R.
The rate of interest is also indicated as ‘One rupee per term’. The rate of
interest of one rupee per annum is denoted by i. That is
i= Interest Rate per rupee per annum .
The interest on Rupee one for one day at the rate of 1% per annum is
called Common Multiple. With the help of this result, the interest is
computed on any principal, for any time and any rate of interest.
of Interest
ere are two types of interest :
. Simple Interest
). Compound Interest ‘ . :
i : Simple Interest (abbreviated as S.1.) is the interest
. Simple Interet sD peoal alone at the end of enc term or time period
‘When the simple interest is added to the principal t
n out becomes the prnepal forthe next term, then the interest so tained
; i 1). In other words, w s
compound interest (bred period (often called interest period. oF
i, produced after to the principal and the whole amount then produces
SBP ahs next period, then the eum by which the original principal is
st for the next per the specified conversion periods is known as compoun
For exam ee
rinciy ial principé
Principal for first term = Principal (or origin:
Principal for second term = Amount of first term
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OOTXY
or _(00r ) 200 5 ge «
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Sain,
© scanned with OKEN Scanner RENT TYPES OF irenegr paras 199 i
Jeulate Simple Interost+
~ormula : (1) Simple Interest = Principal x Rate x Time
Gi) Simple Interest = Amount ~ Pancip l
al
je.
ration 1
ind the principal and a1
te of 5% per annum, Ut to earn Rs, 150 simple interest in 6 years at
ion
incipal Amount
Simy ale Interest x 10 _ 150x100
. RatexTime —~ 5
Amount = Principal + Simple Interesz = 5
ration 2
What amount should be deposited i
the rate of interest is 12% posted in a bank to earn Rs. 6,000 per annum
ion
ormule : Principal = Simple Interest x 100
Rate x Time
Required Sum = 8:00 x 100 _
‘a um = 2x1 = Rs- 50,000
= Rs. 500
rest = 500 + 150 = Rs. 650
ration 3 :
\ certain sum and interest in 4 years becomes Rs, 480. If interest is Vth of
rincipal, find the principal and rate percent per annum.
ion :
in first case, 1
Time = 4 years, Simple Interest =§ Principal
Hence Rate = Simple Interest 100 _ 5 Principal x 100
Principal x Time Principal x4
ie, Rate of Interest, R = 5% per annum )
in second case,
‘Amount = Rs. 480, Time = 4 years and Rate = 5 |
Amount x 100 __ 480x100
jncipal = —Amount x 100_ _ 480 x 100 _ AD)
fence Principal = 759 Rate x Time 7 100 +5 x 4 ~F*: 400 (2)
ration 4
at principal in 19 years at 1% simple interest will earn the same interest
. 1,900 in 8 years at 6%?
PRT
100
1,900%6%8 _ ps g19
100
912
__.. 1 _ 100 x Simple Interest
Principal = ~~ “Time x Rate
Fle Taterescan be found out by Unitary Methods or ratio and proportion method. But the
of formula is more suitable.
(& scanned with OKEN Scanner SAITYA BHAWAN PUBLICATIONS
00 x 912
~ Principal = 220227"
1x7,
100x912, 100 9122
15 19x15 “Re. 649
19x
Mlustration §
In what time will
the interest on a sum of money be 4/6th of tho
10% simple interest? moun,
ri
Solution
Let Principal be Rs, P and ‘Time be T years.
Si pe PxRat
‘Simple Interest = 799 or
Pxl0xT_p, PT
=“j0o0 "10
and ‘Amount = Simple Interest + Principal oll
PP pop(i+—
+P=P{1+ wn)
According to the question,
‘Simple Interest = 7 Amount
= pri4 a(n + 3)
T. *
=
=
=
That is Required time = 40 years
Illustration 6
‘A sum of money amounts to Rs. 3,576 in 42 years at 10}% simple inter
When will it be § times itself at the same rate?
Solution
‘ 42 14 ie. 21,
‘Time = 45 =“ years, Rate = 105% =" %
Amount = Rs, 3,576
Amount x 10
100 + Rate x Time
Principal = 2576x100
Principal
_
8,576 x 100 _ 3,576 x 100 _ pe, 2,400
*" 100 +49 149
Amount = $ Principal = 5% 2499 - ps, 6,000
Interest = 6,000 ~ 2,400 = Rs. 3,600
Now
(& scanned with OKEN Scanner ——
. 201
7 NT-TYPES OF teensy RATES __———
Required Timo = Interest x 100
Principal x Rate
100x100 _3,600x 100 «2 _ 100 . 443 years
Tee 400 « 21
certain sum at simple int
ain gum at simple interest becomes Re, 1,20 i Re 1)
ind the principal and rate of interest, ae ee ailagpur 2008)
Amount of two
years = Rs. 1,200
s aroun of three years = Rs, 1,300
Simnle Interest of one year = 1,300 - 1,200 = Rs. 100
ind Simple Interest of two years = 2x 100 = Rs, 200
“ .o Principal = 1,200 - 200 = Rs. 1,000 AD)
low, Principal = Rs. 1,000, Simple Interest = Rs. 200, Time = 2 years
Rate = Simple Interest x 100
Principal x Time
= 200 x 100 10
. . 1,000x2—
‘That is, required rate of interest = 10
ration ® st 0% per year
‘Ajay obtained a loan of Rs. 4,000 at an i ite of year. He
diately lent Rs. 2,500 at an interest on oe er em we ‘Gran and the
ce at 12% per year to Deena. After three years he collected the amounts due
fem and repaid his loan. Find his gain,
tion
Interest paid by Ajoy =P 2X7, here P= 4,000, R=6,7=3
000 x 6x3 _ Al)
0 Rs. 720
PxRxT w a
eg here P= 2,500, R= 9, T=3
terest received from Kiran
2)
terest received from Deena =? ~ 2% D here P= 1,500, R= 12, T=3
= 2002128 apy, ai (3)
75 + 540 = Rs. 1,215 a)
Interest received — Interest paid
215 - 720 = Rs. 495
tration 9 :
ount to Rs, 9,720 after 3, 4 and 5 years at simple
‘Three equal principals am
areye ga find the principal.
lution
Tet each Principal be Rs. 100
to at Princij Rate x 12
Formula : “Amount = Principal + Punsipal» Tete xe
“Amount for 3 years = 100+ 100x6x 3 _ 100 +18=Rs. 118
“Amount for 4 years =100+ 220355 "4 = 100 + 24=Rs. 124
“Amount for years =100+ 220355 %2 = 100 + 90=Re, 190
(& scanned with OKEN Scanner 202 SAHITYA BHAWAN PUDI
- ‘Total Amount « 118+ 124+ 190" Re,g72 TN
When total amount is Rs, 372 then each Principal = Ra, 100
When total amount is Re. 3,720, then each principal
100% 3,720. es 1999
372 Y
‘Thus, each Principal « Ra, 100 and Total Principal = Rs. 3,000,
Niustration 10
i Iz een Hari and Shyam, so that Hari's share at ¢
fifth are eran ee share at tho ond of seventh year at the teen y
If
pa ey,
Solution
Vet Haris share = Re x, hence Shyam’s share @ Re. (2,708 ~ x)
x8x
Hari's Amount = 795 = 100 1 ara o
2,708 - x) x 8X7 _ 2,708 x 8x7
Shyam's Amount = @:708=3) 0 at a
Comparing (1) and (2),
—! 40x _ 2,708x8x7_ 56x
F100 =o9ietee 100) 100
96x _ 2,708 x 8x7
ad 100 100
x= 108X827 _ 1979.67 = 1,580
Thus Hari’s share = Rs. 1,580
Shyam’s share = 2,708 - 1,580 = Rs. 1,128
EXERCISE A
2 Whatis the simple interest on Rs. 1,200 at an annual rate of 5% for 5 years? Find the mous
also, (Ravishankar, 1992) (Ans. Rs, 330, Rs. 1539,
% A Bank advances Rs, 7,850 for7 months atthe rate of 82%p.a. ordinary simple interest, Wha:
‘sum will have to be repaid at the end of this period? UAns. Rs. 8239.25
‘3. Find the timé in which Rs. 550 will amount to Rs. 605 at 4% per annum simple interest,
= i Uns. 23 yean}
4 Accertain sum doubles itself after 20 years on simple interest. What will be the amount ate
40 years ? or What times the amount will be after 40 years ?
(Ravishankar, 2003) (Ans. 3 fi
5. In what time will the simple interest on Rs. 500 at 6% be equal to the ito Re
8 years at 5%? (Ans. 7.year)
@s Person had Rs, 2,000, He lent out its one part of 6 years at 7% and the remainder for yeas
at 9% simple interest. He found that the interest on the first sum was double than co ie
second. Find the two parts. (Ans, Rs, 1125 and Rs. 81)
C2) Me Patel deposit Re 500 na Bank tthe beginning ofthe first year, Rs. 580 atthe begining
ofthe second year and Rs 550 atthe beginning ofthe third year. The bank pays 8% pa snp
interest. What willbe the amount in his account at the end of thin] year?
lane. Rs, 1,828801
Ores Tent out Rs. 6,000 to Ram for 2 years at a certain rate of simple interest and lent out
Rs. 600 to Shyam for 5 years at the same rate, If he gots Rs. 456 in all as interest from bot
of them. Find the rate of interest, 1
Ans. 33% 2)
9 Asum of money plus its 4 years simple interest makes an amount of Rs, 1,000, If the interest
‘ate is increased by 20% then money becomes Rs, 1,040 in the same time, Find out
principal and rate of interest,
| Ans. Rs. 800, ol
0. The interest on a sum of money at 6% p.a. for 7 yeas is equal to tyige the interest on anol
‘sum of money for 9 years at 5% p.a. Find the ratio of the two sums, [Ans. Py :Pa= 18!
(& scanned with OKEN Scanner L ——ES OF my
ma ~SEINTEREST RATES Pd
m
fe . Will double iteoltin 16 years?
jnossmnn borrowed
hoe barrow ftom wo tend (Ravishankar, 1998) | Ams. os]
1G ERs, 196 for one yon Fria tat for the a
a Your, Find yet for the other wee qin or one Joan the rate of
* 1 tho mam borrowed ‘as por annum He paid @ total
on each rate of interest by him.
eat which Maa ts a0 Tete
ny was iene hh Amounte to Re, 2,880 in two years
certain sum at a certain rate por avishan Aas Find the rate of interest also.
je AS Sand Rs. 12,000 in 6 years, Find the 2 enum timp cae nes
ee Neprinpal wd fier es 22008
anv RE Boot; Bite ;
yt am el amount Rs 6 200963 lanpur, 1996) LAns. Re. 7,500;
ys NTggamounts © RS. 9412 in 20 yegng? Atma rte of ximple ects shite
ilaspur, 1992) (Ans. 5%, Ba. 4,000)
cortain principal for 6 montha at 52%
sm instead of 5 m 1
gern onthe a65% per annum He th
9. What was the principal? 1us made an error of i) 40 Paise, (ii)
Ravishankar, 2000,
: , 2000, Bil .
yp Dvd BE 18,50 in three part that iar, 2000 Ans. () Rs. 960, i) Rs, 60,000)
+ (qual in 3, 4 and 10 years, ‘Bileat Simple interest of 10% pa. the amounts become
a Atathr left Rs, 16,960 forhis thre sons BCag } lAns. Rs. 7,000; Rs. 6,500; Rs. 4,550)
18 fie directions thatthe sum would dB Cage 16 years, 15 years, 14 year respectively
amount er ie principal) ‘when they are adult Gone tat three sons get the same
amota at 5% pa, cleuate their inital sums (rine) cold). Assuming the rate of simple
7 i lAns. Rs, 6520, Rs, 5,280
sgbvside Rs 6500 into three parts so tha their interest @ 4% pa ai er ce 5008
2, a5 respecti
a year and 6 years respectively areequal. (Ans, 2,600;Re, 2000 and Rs, 1,001
‘vide Rs. 2,600 into three parts in such a way that the simy
Co ee aioe
(Ans. Rs. 1,200; Rs, 800 and Rs. 600]
DIFFERENT TYPES OF INTEREST RATES
() Flat Rate : When the rate of interest remains same for all the terms it is
celled Flat Rate. The importance of this word is signified in case of payments on
Ca rt fhe debt is paid in instalments or atthe end ofthe specified period,
a peof interest is flat. No concession is given on the instalment paid earlier.
pe Tis “the process interest on valance” is not followed.
i) Ordinary Interest Rate : To compute interest easily, when. one Hot is
aaasiereh as of 360 days (e., each month is eonsidered of 30 days) then the rate
perennum ig 0500 dav inary interest rate. The interest obtained at this rate is
:
s ordinary interest. :
sore reat Rate : When the year is considered of 365 days, then the
rte per annum is termed as exact interest rate.
ont out a Sum of money at a
‘9,600 in 5 years. How mu “imple intere
ait
h moni
1 ind BE
ee sristake a Bank Clerk calculated the interest
: ston a
Mustration 1
™ Find the ordinary simple interest of Rs. 580 at the rate of 80% per annum for
days.
Solution.
One Year = 12x 30 = 960 days
: 220
= 220 days 360 ‘years: a
Ordinary simple interest = Principal x 799 * ‘Time
8, 220
= 580 X 799 * 360 Ve
= Rs. 28.36
(ea Thamonths), then ordinary simple interest
Remark 1 tfwe have months instead of 60Y®
willbe equal
and exact simple interest
(& scanned with OKEN Scanner SAHITYA BHAWAN PUBLICATIONS
Since 74 months = 42 months
i 15 15x30 4, ~4)
and 174 months = 3° months = 75> days x
“6
2 terest between two dates we neglect the first date ang -
ees lel date searing the nurber of days In giles sear amy,
is taken as 866 and in other years itis taken as 365. ws
Nlustration 2
Calculate the simple interest on Rs. 1,268 for 219 days at the rate of
th
annum.
Solution
Principal x No. of days x
Simple Interest = ee eee oO nate
1,268 x 219 x 28
Simple Interest = 355799 = Rs. 47.55
TMustration 3
Find simple interest of Rs. 7,800 from 15th November, 2001 to 14th Fe
2002 at 6% per annum. Ravishankar, 208}
Solution
To find the number of days :
November 2001 —+ 15 days Neglecting Nov. 15)
December 2001 —+ 31 days
January 2002 —> 31 days
Febuary 2002 —» 14 days
Total number of days = 91
. Principal x Number of days x Rate
‘Simple Interest = See
7,800 x 91x 6
= "365x100 = RS: 116.68
Illustration 4
What is the amount of Rs. 4,000 at 4% simple interest from Jan. 10, 1996 to
April 11, 1997?
Solution
To find the number of days
January 10, 1996 to December 31, 1996 = 366 - 10 = 356 days
(Since in the leap year Feb. is of 29 days)
January 31 days
Feb. 28 days
For 1997) vrarch
April 11 days
Total no. of days = 356 + 101 = 457
Simple Interest = Principal x Rate x Time
100
451
4,000%4% 555 (Assuming 365
100 days in a year)
‘i 4,000 x 4x 457 _ 14,624
terest = “PTS ao = AA 028 _ Rs, 200.33
ele 100 x 365 73 Res, 200
Amount = Principal + Simple Interest
= 4,000 + 200.33 = Rs. 4,200.33 d
(& scanned with OKEN Scanner == DIFFERENT TYPES oF INTEREST RATES
outate Interest by Common Multiph :
ior
en ul atc pee a i en
weyaces of decimal, it may be Tene i et is write
ithe simple interest on Re, According to convenience.
=iklx1
_ Here we have assume 3 365 x 199 = 00002739726 = 0000273973
Heya then the ealeulat eve 1 8 year If the number of days is taken 966 in. _
ion is done accord
stration 5 imple i ae
‘nd the simple interest on R,
oy ‘the method of Common ‘Muiiones the rate of 44% per anno fr 120
inne Interest on Re. 1 at 1% pa, for one day = ,0000273973
re ioe: te re 18 pa. for 100 days =.00275078
simple Interest on Re. 1 at 19 na fe eos = 000547946 :
simple Interest on Re. 1 at 4.5% p, ae ae 000547946 = 008287676 °
simple Interest on Rs, 2,963 at 4.5% neORTETE x 7 = 014794542
Find! Lory by Thin Tent an an Teattle , 2,963 = Rs. 43.84
Tae ae Nh Ten and Tenn ample interest as given below for few days is
pl ;
Multiplying by 2 in the numerator and denominator in RHS of the formula :
Simple Interest = PEeipal xRate x Number of days
100x365,
We get,
Simple Interest = Pzincipal x Rate x Number of days x 2
100 x 965 x 2
__ Principal x Rate x Number of days x 2
73,000
? simplify the expression in RHS proceed as follows :
(i) Divide (2 x Principal x Rate x Number of days) by 1,00,000, i.e. remove the
point upto 5 places towards left (i) Find of the quotient. (i Find 35 of the
ter obtained in (i) operation. (iv) Find 2 of the number obtained in (it)
on, (v) Add the numbers obtained in (i), (i, ii) and (iv) operations. (vi) Find *
of the number obtained in operation (v) and round off upto 4 places of |
,000
cimal, (vii) Subtract the number obtained in operation (vi) from the number
ined in operation (v).
lustration 6
Calculate the simple interest on Rs. 580 at the rate of 8% per annum for 220
ays with the help of Third-Tenth and Tenth Rule.
lution
‘Steps ; (i) Principal x Rate x Number of days x 2
= 580 x 8 x 220 x 2 = 20,41,600
atic
1
1
{600 = 20.416000
700,000 "2041
Hence
(& scanned with OKEN Scanner Gi $ of 2041600 = 6.80593
i a = 680533
(ii) 10 of 6.80533 = .6
(iv) 4 of 680533 = 0680533
(«) Sum of the numbers obtained in steps (i) to (iv) = 27.9690163
e 7
vi a 33 = .00279699163
wi) 70,000 of 27.969916:
(vii) 279699163 - 00279699163 = 27.97 ~ .0028 approximately
= 27.9672 = Rs. 27.97
Thus required simple interest = Rs. 27.97 ;
(iv) Nominal Rate of Interest : When compound interest is calculated
quarterly or half pear then the predetermined rate of interest per anoa,
Known as Nomial Rate of Interest. 7 i
(w) Bffective Rate of Interest: When compound interest is calculate
quarterly je half yearly the interest added tothe principal each time nen
Principal and accordingly the interest rate per annum will be more than the wes,
rate. This new rate of interest is termed as Effective Rate of Interest. In a
nis, when compound interest is calculated monthly, quarterly or hait Cae
wor
then the interest earned on Rs. 100 for a year is Effective Rate of Interest. 9°"
iy
‘ De ee
us reife) sels
m= the number of times interest is compounded in a year
and 1+j= Amount of Rupee 1 after one year.
Then _j = effective rate of interest per rupee per annum.
Remark : When compound interest is calculated yearly, the concept of effective rate
‘nominal rate’ does not arise.
Illustration 7
If nominal rate of interest is 4% per annum and interest is compounded
quarterly, then find the effective rate of interest. (Ravishankar, 2005)
Solution
Interest on Rs. 100 for 1 year = Rs. 4 Al)
: Amount = 100+ 4=Rs. 104
When interest is compounded quarterly, then
x4
Amount = 100 (0 “in
100
“4
: AY 400(22
= Amount = 100/1+35] =100|55
Amount = 100 (1.01)* = 100 x 1.041 = Rs. 104.10,
{using log abe
a Compound interest = 104.10 - 100 =Rs. 4.10
Thus, the effective rate of interest is 4.1% per annum.
Illustration 8
Let Rs. 2,000 be invested at 10% p.a. (nominal rate) for 4 years where interes
is compounded quarterly. Find the effective rate of interest.
Solution
Interest is compounded quarterly,
Formula : ‘Amount = Principal [aa
(& scanned with OKEN Scanner _SERENT TES OF tena nares
o Amount = 2,000 14104 Mad
100
1
= 2000/14 10
sd
18
= 2,000 *|
4
2,000 1.479, {using log tables
= Rs, 2,958
again, Amount, A = Rs, 2,958,
incipal, P = Rs, 2,000, Time, n= 4 years
4
Then AuP ( “i where R is effective rate
7 2,958 = 2,000/14 ay y= c.a7o!
114 0 logy = } log (1.479)
R__ (2,958 4
2 100 “(2,000 ~2 =4 (0.1700)
103
= 103 x 100 = 10.3
‘That is the effective rate of interest is 10.9% per annum.
(vi) The Force of Interest : Let
i = nominal rate of interest |
J = effective rate of interest -
‘m = Number of times interest is compounded in a year
then
‘Amount for 1 year of Rupee 1=1+j= =
In case of continuous compounding, i.e, m —.
The effective rate of interest is given by
a 3)"
reset (1+5)
18
4 1
vie [oat |
=leP=e,
a |
Definition : The nominal rate i (denoted by 5) compounded continuously and
juivalent to a given effective rate
when m2
{ then +=
Sy a4
atin (145)
is called the force of interest.
After t years,
5
pr=po(1 +i) = Pole)
mee loge (1 4.),,/= effective rate of interest per rupee per annum
initial principal
amount after ¢ years
(& scanned with OKEN Scanner aves
es SAMITYA BHAWAN PUBLICATIONS
a
In other words,
/ = Principal
Let a Taato of Interest percent per year
7 =Time in La
i=~— = interest
A = Amount 100 nae iebe
per year
If interest in compounded continuously
Ae Pe?
then ee
= Ae wie
oma’ For more explanation go through the chaptor ‘Annuity:
Illustration 9 ,
A person deposits Rs
‘annum compounded continuous!
10 years?
Solution i:
Formula : Amount after T years, A it
i= 799° 7= 10, P=5,000
. 6,000 in a Bank, which pays an interest of 1
Janueusly. How much amount wil be in his account Rt
Here 100°
ft x0
Amount, A = 5,000 x e190
=5,000 xe
= 5,000 x elt + ell = 3.0042
=5,000 3.0042 by using table or
=Rs. 15,021 logarithm
‘Miscellaneous Examples
Illustration 1
Accredit balance of Rs. 750 stands in current account of Sunil on 1st January,
2001. The bank allows interest at 43% per annum on each 30th June and 31st
December and charges 2% as collection charges. The bank collect cheques of Rs,
250 and makes payment of Rs. 200 at the end of each month for him. What balance
will stand to the credit of his account on 30th June?
Solution
5 ; [Balance on which|
Date Deposit Withdrawal interest is Period |
counted
1 Jan., 2001 — — 750.00 6 months
31 Jan., 2001 250 200 50.00 5 months
Feb., 2001 250 200 50.00 4 months |
31 March, 2001-250 200 50.00 3 months |
30 April, 2001 250 200 50.00 2 months
31 May, 2001 250 200 50.00 ‘1 month
30 June, 2001 250 200 50.00 Viens
Simple Interest = (750 x6 +50 (5+4434241))x2x—t-x
° ‘ Dx <559