MATH

Simple & Compound

Interest

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 SIMPLE & COMPOUND INTEREST

Simple Interest
You may have come across a situation when you have to
drive for a long route with seven members. Many of you
buy a car on rent for a trip and you pay the higher
charges of the car to the owner as you will use it for
personal use. Similarly, whenever any person is in need
of money for education, personal or business purposes
he borrows it from a bank and pays interest on it. 'Money'
is a commodity just like a car.
If you deposit your money in a savings account either at
a bank or the post office you also get interest on it,
because by depositing money you are really lending it
either to the bank or to the Government which makes use
of your money as it likes and pays you interest for using
it. The original sum of amount loaned/deposited is called
the Principal, and the amount of money you pay for
borrowing the money or the amount of money you earn
on depositing is called the Interest. Furthermore, it
depends on how much has been borrowed and the length
of time for which it is borrowed.

1
If the interest for borrowing 100 rupees for 1 year is 5
rupees than we say that the interest is reckoned at the
rate of 5% per annum ('annum' refers to 'year')
Interest is usually paid at fixed intervals i.e. yearly, half-
yearly, quarterly, or monthly just as rent is so paid and in
this case the principal is said to be lent at Simple
Interest. If the simple interest for any given time is added
to the principal then the sum is called the Amount at
simple interest for that time.
Thus, if a person borrows 1000 rupees for 5 years at 10%
per annum, the simple interest for 1 year is 10% of rupees
1000 i.e. [(10/100) × 1000] = Rs. 100 and therefore, for 5
years is 5 x 100 i.e. 500, and the amount at simple
interest for 5 years is the sum of rupees 1000 and 500
rupees i.e. rupees 1500.
To conclude the above situation, let’s define some
important terms:
Principal (P): The money borrowed or lent.
Interest (I): It is the additional money paid to the lender,
for the use of the money borrowed.
Rate (R): Interest for 1 year per Rs.100

2
Time (T): The time period for which the money is
borrowed.
Amount (A): Principal + Interest
Simple Interest: If the interest is calculated on the original
money borrowed throughout the period of loan, i.e. there is
no change in the principal, and then the interest is called
simple interest.
Ex. 1: Ajay deposits Rs.2000 in a savings bank account.
The bank pays interest at the rate of 5% per
annum. What amount can Ajay get after one year?
Sol: Interest on Rs.100 for one year = Rs.5
5
∴ Interest on Rs.1 for one year = Rs.
100
5
∴ Interest on Rs.2000 for one year = Rs.  2000
100
= Rs. 100 ∴ Amount = Rs. 2000 + Rs. 100 = Rs.
2100
∴ Ajay will get Rs. 2100 after 1 year.
Ex. 2: Palak deposited Rs. 5500 in a finance company
which pays 14% interest per year. Find the amount
she will receive after 3 years.

3
Sol: Interest on 100 for year = 14
14
∴ Interest on 1 for 1 year = Rs.
100
14
∴ Interest on 5500 for 3 years = Rs.  5500  3 =
100
Rs. 2310
∴ Amount = Rs. 5500 + Rs. 2310 = Rs. 7810
∴ Palak will receive Rs. 7810 after 3 years.
Formula for Simple Interest
To find simple interest on Rs. P for T years at R% per annum.
R
The interest on Rs. P for 1 years is R% of P, i.e. Rs. P =
100
RP
Rs.
100
 RP 
∴ The interest on Rs. P for T years is Rs.  T =
 100 
PR T
Rs.
100
PR T
Hence, we have the following formula: S.I. =
100

4
Ex. 3: In how many years will Rs. 900 yield an interest of
Rs. 324 at 12% per annum simple interest?
Sol: Given, P = Rs. 900, R= 12% p.a. S.I. = Rs. 324
PR T
Using the formula, S.I. =
100
900 12  T
We get, 324 =  108 T
100
⇒ T = 3 years
Ex. 4: At what rate of simple interest will 350 amounts to
455 in 6 years?
Sol: Given, P = Rs.350, A = amount = Rs.455, T = 6 years
∴ S.I. = A – P = 455 – 350 = Rs. 105,
PR T
Now, using the formula, S.I. =
100
350  R  6
We get, 105 =
100
R = 5% p.a.

5
 Important Notes:
(i) When time is given in days, we convert it to years by
dividing it by 365.
(ii) When time is given in months, we convert it to years
by dividing it by 12.
(iii) When dates are given, the day on which the sum is
borrowed is not included but the day on which money
is returned is included, while counting the number of
days.
(iv) If Rate is 1.5% per month that means Rs.1.50 for
Ex. 5: Find the Simple Interest and Amount when
every Rs.100 per month = Rs.1.5 × 12 = Rs.18 for
Principal is Rs.6250, Rate = 1% per month and
Time = 73 days.per year= 18% p.a.
every Rs.100

Sol: Given, Principal = Rs.6250, Rate = 1% per month =

(1 × 12)% p.a. = 12% p.a. , Time = 73 days =
73 1
year  year
365 5
PR T 6250 12 1
S.I. =  Rs.  Rs.150
100 100  5
∴ Amount = P + S.I. = Rs. 6250 + Rs. 150 = Rs. 6400
Ex. 6: A certain sum of money becomes thrice in 10 years
at a certain rate of interest. It will become how
many times in 20 years at the same rate of
interest?

6
Sol: Let the sum of money is ‘P’, it becomes thrice i.e.
‘3P’ in 10 years.
Principal = P ; Amount = 3P; So, Interest = 2P
P  R 10
2P 
100
R = 20%
P  20  20
Now, I 
100
I = 4P. So, Amount = P + 4P = 5P
So, the sum becomes 5 times.
Ex.7. A sum of Rs 3,800 is lent out in two parts in such
a way that the interest on one part at 8 % for 5
years is equal to that on another part at 1 2 % for
15 yrs. Find the sum lent out at 8 %.
Sol. Let P be the sum let out at 8% and Q be the sum
let out at 1 2 %. So P  8  5 = Q  1 2  15.

Therefore P : Q = 15
= 3 : 16.
285

The total sum of Rs. 3,800 is to be divided in the

ratio of 3 . 16. This way the first sum is 3800 
3 = Rs. 600.
19

7
Ex.8. Sham Rao deposits Rs 2,000 in his savings
account at Bank of Maharashtra at 4 % and Rs
3,000 in US – 64 at 14 % p.a. Find the rate of
interest for the whole sum.
Sol. Sham Rao earns an interest of Rs 0.04  2000 =
Rs. 80 in the Bank of Maharashtra account.
He earns an interest of Rs. 0.14  3000 = Rs. 420
in US – 64. ⇒ Total interest income = 80 + 420 =
500.
⇒ Total principal = 5000.
So rate on total amount = 500
5000 = 10 %.
Ex.9. A sum of money lent out at simple interest
amounts to Rs. 720 after 2 years and Rs. 1020
after a further period of 5 years. Find the rate
percent.
Sol. Interest for 3 years = 1020 – 720 = 300
Interest for 2 years = 200. Hence P = 500.
So 200 = 500  R  4  R = 10 %.
100

Ex.10. The simple interest on a sum of money is 1/9 of

the principal and the number of years is equal to
the rate % p.a. The rate % p.a. is

8
 P PR R
Sol.   R2 = 100
R= 10
3 %.
1
9 100 9 3 3

Ex.11. If a sum of money at a certain rate of simple

interest doubles in 5 years and at a different rate
of interest becomes three times in 12 years, then
what is the better rate of interest?
Sol. Rate of interest in 1st case = 100(2  1)  20% .
5

Rate of interest in 2nd case = 100(3  1)  16 2 % .

2 3

So better rate of interest is 20%.

Ex.12. What sum of money will amount to Rs. 1,768 in 3
years at simple interest if the rates of interest for
the 3 years are respectively 2.25 %, 3.5 % and 4.75
%?
Sol. Let Principal be P.
P  2.25 1
∴  0.0225 P & 0.035 P & 0.0475P
100

 P + 0.0225 P + 0.035 P + 0.0475 P = 1768

1.105 P = 1768  P = 1600.
Ex.13. Anoop borrowed Rs. 900 at 4 % p.a. & Rs. 1,100 at
5 % p.a. for the same duration. He had to pay Rs.
364 in all as interest. Find the time period.

9
Sol: Interest at 1st rate for 1 year = 900  41 = Rs. 36
100

Interest for 1st year at 2nd rate = 11000.05 = Rs.

55
 Total interest for 1 year = Rs. 91
Hence required time = 364
= 4 years
91

Compound Interest
As we know how to calculate the simple interest, but in
normal business circles, simple interest is rarely used.
Suppose a man deposits Rs.1000 in a saving account at
an interest rate of 10% per annum. At the end of one year
he will get Rs.100 interest on his deposit. However,
unless he takes out his Rs.100 in cash, it will be added to
his original Rs.1000. Thus, if he leaves his money in his
account, in the next year the bank will be paying him
interest on his original Rs.1000 plus the Rs.100 interest,
i.e., on Rs.1100. In the third year the interest will once
again be added to the new principal on Rs.1100, and so
on for a long as the money is left in the account. This
kind of interest is known as compound interest.

10
Ex.14: Find the compound interest on Rs. 1000 for 3
years at 10 % per annum.
Sol: Step I: Principal for the first year = Rs.1000
1000 10 1
Interest for the first year = Rs.  Rs.100
100
∴ Amount at the end of first year = Rs. 1000 +
Rs.100 = Rs.1100
Step II: Principal for the second year = Rs.1100
1100 10 1
Interest for the second year = Rs.  Rs.110
100
∴ Amount at the end of second year = Rs.1100 +
Rs.110 = Rs.1210
Step III: Principal for the third year = Rs.1210
1210  10  1
Interest for the third year = Rs.  Rs.121
100
∴ Amount at the end of third year = Rs.1210 +
Rs.121 = Rs.1331
∴ Compound Interest at the end of 3 years = 1331
– 1000 = Rs.331

11
Ex. 15: Find the compound interest on Rs.2000 at 20%
rate per annum for 2 years.
Sol: Step I: Principal for the first year = Rs.2000
2000  20  1
Interest for the first year = Rs.  Rs.400
100
∴ Amount at the end of first year = Rs. 2000 +
Rs.400 = Rs.2400
Step II: Principal for the second year = Rs.2400
Interest for the second year =
2400  20 1
Rs.  Rs.480
100
∴ Amount at the end of second year = Rs.2400 +
Rs. 480 = Rs.2880.
∴ Compound Interest at the end of 2 years = 2880
– 2000 = Rs.880
Deducing a formula for Compound Interest:
The arithmetic involved in working compound interest
can be quite complicated when the number of payments,
or the length of time, or both are large.
However, just as there is a formula for calculating simple
interest, there is a formula which can be used to work out

12
compound interest also. Using this formula saves a great
deal of time.
If Rs. P1 is the sum on which interest is compounded
annually at the rate of R% per annum.
Let P1 = Rs. 1000 and R = 5. Then by the steps mentioned
above
1000  5  1 P  R 1
1. SI1 = or SI1 =
100 100
1000  5  1
So, A1 = 1000 + or
100
P1R
A1 = P1 + SI1 = P1 +
100
 5   R 
 10001    P2  P1 1    P2
 100   100 
 5  5 1
2. SI 2  1000 1   or
 100  100
1000  5  5 
 1  
100  100 

13
 P2  R  1
SI 2 
100
 R  R
 P1 1  
 100  100
PR  R 
 1 1  
100  100 
 5  1000  5  5 
A 2  1000 1   1  
 100  100  100 
 5  5 
 1000 1  1  
 100  100 
2
 5 
 1000 1    P3
 100 
A 2  P2  SI 2
 R  R  R 
 P1 1    P1 1  
 100  100  100 
 R  R 
 P1 1  1  
 100  100 
2
 R 
 P1 1    P3
 100 

14
 Proceeding in this way the amount at the end of n
n
 R 
years will be A n  P11  
 100 
n
 R 
Or, we can say A n  P 1  
 100 
n
 R 
Important Results: A  P1  
 100 
n  R 
n 
 R 
    
and C.I.  A  P  P1   P P 1  1
 100   100  

So, the above two examples can also be solved with the
help of formulas.
Ex. 16: Find the compound interest on Rs. 5000 for 3
years at 10% per annum compounded annually.
Sol: Given, Principal = Rs. 5000, Time = 3 years, Rate =
10%
n
 R 
As, we know A  P1  
 100 

15
 3
 10 
 50001  
 100 
3
 11  11 11 11
 5000   5000     6655
 10  10 10 10
C.I = A – P = 6655 – 5000 = 1655
Sometimes, the time period is given in fractions

If the interest is compounded annually but time is in fraction

of a year i.e. T = n + f, where ‘n’ is an integer and ‘f’ is a
fraction then
n
 R   Rf 
A  P1    1  
 100   100 

Ex.17: Find the compound interest on Rs.1000 at 10%

1
rate per annum for 2 years.
2
1
Sol: Principal = Rs. 1000; Rate = 10%; Time = 2 years.
2
n
 R   Rf 
A  P1    1  
 100   100 

16
 2
 10   5 
 1000 1    1  
 100   100 
11 11 21
 1000   
10 10 20
 Rs.1270.5
Hence value of Compound Interest = A – P =
1270.5 – 1000 = 270.5
Rate Compounded Annually, Half Yearly (Semi Annually),
Quarterly or Monthly basis:
Now, think of a situation, Ajay has a saving account in
bank; rate of interest offered by bank is 8% p.a. He
deposited Rs.1000 in the account. After 6 months he
received interest. Did he get 8% interest?

As his money is deposited with the bank for 6 months so

bank will not pay interest for complete year. In this
situation bank will pay him only 4% interest.
The time period after which the interest is added each
time to form a new principal is called the conversion
period. When the interest is compounded half yearly,
there are two conversion periods in a year each after 6
months. In such situations, the half yearly rate will be
half of the annual rate.

17
Now think what will happen if interest is compounded
quarterly?
In this case, there are 4 conversion periods in a year and
the quarterly rate will be one – fourth of the annual rate.
If the interest is paid half – yearly, then in the
n
 R  R
formula A  P1   , for R we take because R%
 100  2
R
p.a. means % half – yearly, and for n we take 2n,
2
because n years is equal to 2n half – years.

2n
 R 
A  P 1  
 200 
If the interest is paid quarterly, then in the
n
 R  R
formula A  P1   , for R we take because R%
 100  4
R
p.a. means % quarterly, and for n we take 4n, because
4
n years is equal to 4n quarters. 4n
 R 
A  P 1  
 400 

18
Now, when the rate of interest for successive years are
different.
If the rate of interest is different for every year say R1, R2,
R3 for the first, second, third year, then the amount after
3 years is given by

 R  R  R 
A  P 1  1 1  2 1  3 
 100  100  100 

Ex. 18: Find the compound interest on Rs.80000 for 3

years if the rates are 4%, 5% and 10% respectively.
 4  5  10 
Sol: A  800001  1  1  
 100  100  100 
104 105 110
 80000    Rs.96096
100 100 100
∴ Compound Interest = 96096 – 80000 = Rs.16096
Ex. 19: Find the compound interest on Rs. 1000 at 10%
p.a. in a year when interest is compounded half –
yearly.
Sol: Principal = Rs. 1000, Time = 1 Year = 2 half years, n
=2
Annual Rate = 10%

19
 10
∴ Half – yearly rate =  5%
2
2
 5 
A  10001  
 100 
21 21
 1000  
20 20
 1102.5
C.I = A – P = 1102.5 – 1000 = 102.5
Ex. 20: Find the compound interest on Rs. 8000 at 20%
p.a. in 9 months when interest is compounded
quarterly.
Sol: Given, Principal = Rs. 8000, Time = 9 months = 3
quarters, n = 3
Annual Rate = 20%
20
∴ Quarterly rate =  5%
4
3
 5 
A  8000 1  
 100 
21 21 21
 8000   
20 20 20
 9261
C.I = A – P = 9261 – 8000 = 1261

20
As we know, and from the above Ex. it is clear that for the
first year the value of simple interest and compound
interest is same and from second year onwards, the
value of compound interest is always greater than the
value of simple interest.
Now, there are some questions in which we have to
calculate the difference between compound interest and
simple interest.
If the difference between compound interest and simple
2
interest is of two years then, Difference = P  R 
 100 
If the difference between compound interest and simple
interest is of three years then, Difference =
2 3
 R   R 
3 P    P 
 100   100 

Ex. 21: Find the difference between compound interest

and simple interest on Rs. 1000 for 2 years at 10%
p.a.
Sol: Principal = Rs. 1000, Time = 2 years, Rate = 10%
P  R  T 1000  10  2
S.I. =   200
100 100

21
 n
 R 
C.I. = A – P = A  P1   P
 100 
2
 10 
 10001    1000
 100 
= 1210 – 1000 = 210
Difference = C.I – S.I = 210 – 200 = 10
Or
2 2
 R   10 
by formula, Difference= P    1000     10
 100   100 
Ex. 22: Find the difference between compound interest
and simple interest on Rs. 1000 for 3 years at 10%
p.a.
Sol: Principal = Rs. 1000, Time = 2 years, Rate = 10%
P  R  T 1000  10  3
S.I. =   300
100 100
n
 R 
C.I. = A – P = A  P1   P
 100 
3
 10 
 10001    1000
 100 
= 1331 – 1000 = 331

22
 Difference = C.I – S.I = 331 – 300 = 31
2 3
 R   R 
Or by formula, Difference = 3  P   P 
 100   100 
2 3
 10   10 
 3 1000    1000    31
 100   100 
Ex.23: If Rs.2000 becomes Rs.2400 in 7 years at a
certain rate of compound interest, how much it will
become in 14 years?
Sol: Compound interest in 7 years = 2400 – 2000 =
Rs.400
400
Rate of int erest in 7 years   100  20%
2000
n 2
 R   20 
A  P1    2000 1    Rs.2880
 100   100 
Ex.24 If Rs.1800 becomes Rs.2700 in 6 years at a certain
rate of compound interest, what will be the amount
after 18 years?
Sol: Compound interest in 6 years = 2700 – 1800 = 900
900
Rate of int erest in 6 years   100  50%
1800

23
 n 3
 R   50 
A  P1    18001    Rs.6075
 100   100 
Now, think that in the above situation if principal is
not given and amounts at the end of 6 years and at
the end of 12 years are given, can we find the
principal or amount at the end of 18 years?
For this we have to find the change pattern in given
time period. In the above question amount at the
end of 6 years = 2700 and at the end of 12 years =
4050
4050 3
∴In 6 years amount grew by = 
2700 2
As ratio is 3:2, it means if principal is 2 then
interest is 1 and Rate of interest for 6 years is 50%.
Thus we get the next amount by multiplying the
previous amount by 3/2.
Ex.25: At a certain rate of compound interest, sum
becomes Rs.2700 in 6 years while it becomes
Rs.4050 in 12 years. How much it would become at
the end of 18 years? Also find the principal.
4050 3
Sol: Ratio of amounts in 6 years gap = 
2700 2

24
 So amount at the end of 18 years =
3
4050   Rs.6075
2
2
Hence Principal = 2700   Rs.1800
3
Ex.26: A sum of money doubles of itself in 4 years at
Compound Interest. In how many years will it
amount to 8 times of itself?
Sol: Let Principal = Rs.100
Amount = Rs.200 ; Rate = R% ; Time = 4
years
n
 R 
A  P1  
 100 
4
 R 
200  100 1  
 100 
4
 R 
2  1   ________(1)
 100 
If sum becomes 8 times in ‘n’ years, then
n
 R 
8  1  
 100 
n
3  R 
2  1   ________(2)
 100 

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 Now, using equation (1) in (2), we get
3
 R  
4
 R 
n
1     1  
 100    100 
12 n
 R   R 
1    1  
 100   100 
n = 12 years
If a sum becomes ‘n’ times in ‘x’ years then
x years = n1 = n times
2x years = n2 = n2 times
3x years = n3 = n3 times
mx years = nm = nm times

So, the above Ex. can also be solving by using this

shortcut:
In 4 years sum becomes = 21 = 2 times
In 8 years sum becomes = 22 = 4 times
In 12 years sum becomes = 23 = 8 times
Ex. 27: A sum becomes 3 times in 8 years at compound
interest. How many times it would become in 32
years?
Sol: In 8 years the sum becomes = 31 = 3 times

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 In 16 years the sum becomes = 32 = 9 times
In 24 years the sum becomes = 33 = 27 times
In 32 years the sum becomes = 34 = 81 times
Ex.28.If Rs 10,000 is invested at 10 percent annual
interest, compounded semiannually, what is the
balance after 1 year?
Sol: The balance after the first 6 months would be
10,000 + (10,000)(0.05) = 10,500 Rupees. The
balance after one year would be 10,500 +
(10,500)(0.05) = Rs. 11025.
Note that the interest rate for each 6 – month
period is 5 %, which is half of the 10 % annual rate.
The balance after one year can also be expressed
as 10,000 [(1 + 10/200)2] = Rs. 11025.
Ex.29. What sum of money lent out at compound interest
will amount to Rs. 968 in 2 years at 10% p.a.,
interest being charged annually?
Sol: An amount of x will become 1.1 x in 1 year at 10 %
interest. In 2 years time it will become 1.1  1.1 x =
1.21 x. So, 1.21 x = 968. Therefore, x = 9681.21 =
800.

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Ex.30. A sum of money is invested at compound rate
payable annually. The interest in successive years
was Rs. 225 and Rs. 238.50. Find the rate % p.a.?
Sol: Interest in two consecutive years was Rs. 225 and
Rs. 238.5. Therefore interest on Rs. 225 for 1 year =
238 – 225 = 13.50. Principal = 225, interest = 13.5,
time = 1 year. Rate = 13.5 225 = 6 % p.a.
Ex.31. A sum of money is accumulating at compound
interest at a certain rate of interest. If simple
interest instead of compound were reckoned, the
interest for the first two years would be diminished
by Rs 20 and that for the first three years, by Rs 61.
Find the sum.
Sol: Principal = p, interest = r,
time = 2 years, then Rs interest differential = [p(1 +
r) 2  p ] – ( 2pr) = pr2 = 20.
time = 3 years, then Rs interest differential = [p(1 +
r) 3  p] – ( 3pr) = pr3 + 3pr2 = 61.
Solving the 2 equations, we get pr3 + (3  20) = 61.
So, pr3 = 1. Also, pr3 = pr2  r = 1. Hence, r = 1 20 = 5
%.

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Ex.32. Find the least number of complete years in which
the sum of money put out at 20 % compound
interest will be more than double.
t
 20 
Sol: Rate of interest = 20%. So P t   >2
 100 

  6 t > 2 = (1.2)t > 2  t = 4 years.

5

Ex.33. The difference in simple interest and compound

interest on a certain sum of money in 2 years at 15
% p.a. is Rs. 144. Find the principal.
Sol: If Diff. between SI & CI for 2 years is Rs. x, then
Principal = x ( 100 )2  P = 144  10000  P = 6400.
r 15  15

Ex.34. A sum of money at compound interest amounts to

thrice itself in 3 years. In how many years will it be
9 times itself?
Sol: R = 100(x1/t – 1) x = 3, t = 3  R = 100 (31/3-1).
Now x = 9, t =? 100 (31/3- 1) = 100 (91/t – 1)
 31/3 = 91/t  31/3 = 32/t 1/3 = 2/t  t = 6 years.

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Ex.35. In what time will a man receive Rs. 85 as
compound interest on Rs. 320 at 12 1 2 % p.a.
compounded annually?
Sol: CI = Rs. 85 A = 320 + 85 = 405.
 405 = 320 (1+ 12.5 )t  t = 2 years.
100

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