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SIMPLE AND COMPOUND INTEREST
Definition
Interest is the amount to be paid on the borrowed money or the

Interest
amount received on the money lent
Principal The borrowed money or the lent money is called Principal.
Amount The sum of the interest and the principal is called the Amount.
The rate at which the interest is charged on the principal is
Interest Rate
called Rate of Interest.
The period for which the money is borrowed or deposited is called
Time
Time.
Interest can be classified in two types:

1) Simple Interest
2) Compound Interest
Simple Interest
When the interest is calculated only on the Principal for every year, it is called Simple
Interest.
Simple Interest can be calculated by the formula:
𝑃×𝑅×𝑇
SI= 100
Where, P = Principal, r = Rate of interest per year, t = Time period in years
Points to Remember
● When the time period is given in months, we convert it into year by dividing it by 12.
● When the time period is given in days, we convert it into year by dividing it by 365.
Q1. Rs.1080 invested for 3 months gave an interest of Rs.27. The simple rate of
interest per annum was:
Solution: 3 months
3
= 12 years
𝑃𝑅𝑇
SI = 100
⇒ 27 = (1080 × r × 3/12)/100
⇒ 27 = (90 × r × 3)/100
⇒ 27 = 270r/100
∴ r = 10%.
Compound Interest
It is the interest paid on the original principal amount and the accumulated past interest.
Formulas related to compound Interest:
𝑅 𝑇
A= P (1 + 100
)
CI = A - P
Points to Remember
● When rate is compounded half yearly, then we take rate half and time double, then A=P
2𝑇
(1 +
( ))𝑅
2
100
● When rate is compounded quarterly, then we take rate one fourth and time 4 times,
4𝑇
Then A= P(1 +
( ))
𝑅
4
100
● If rate of compound interest differs from year to year, then

𝑅1 𝑅2 𝑅3
A= P (1+ 100 )(1 + 100 )(1 + 100 )
Q2. Find compound interest on Rs.50000 at 12% per annum for 1 year if compounded half
yearly.
Solution:
2𝑡
( )
𝑟
2
Amount = P 1 + 100
12 2×1
2
=50000(1 + 100
)
106 2
=50000( 100 )
= Rs 56180
∴ C.I. = A – P = 56180 – 50000 = Rs 6180.
Q3. What will be the amount if a sum of Rs.25000 is placed at CI for 3 years while rate of
interest for the first, second, and third years is 4%, 8%, and 10%, respectively?
Solution.
A = P (1 + r1/100) (1 + r2/100) (1 + r3/100)
= 25000 (1 + 4/100) (1 + 8/100) (1 + 10/100)
= 25000 (104/100) (108/100) (110/100) = 30888.
Tree-method
In this method we assume principle (on the basis of rate and time given) such that it eases our
calculation part and at the end we compare it to the value given in question to get the required
answer.
For example – If 10% interest rate is given for 2 years then we will assume principle as
Rs. 100 and if times is 3 years, then we will assume principle as Rs. 1000. It is done to
avoid any calculation in decimal form.
Q4. Find compound interest for principal Rs 10000, time = 3 years and rate = 10%.
Solution.
Normal Method:
𝑟 𝑡
Amount= P(1 + 100
)
10 3
= 10000 (1 + 100
)
=Rs 13310
C.I. = A − P = 10000 − 13310 = Rs. 3310
Tree Method:
Step 1: Take principle (Rs 10000 here).
Step 2: For year at 10%, interest =
Rs. 1000
nd
For 2 year, total interest =
interest on principle +
st
interest on interest of 1 year =
1000 + 100 = Rs. 1100
rd
For 3 year, total interest =
interest on principle +
st
interest on interest of 1 year +
nd
interest on interest of 2 year =
1000 + 100 + 100 + 10 = Rs. 1210
Step 3: Add all interests = 1000 + 1100 + 1210 = Rs. 3310.
Effective Rate Method

2 3
Effective rate for 3 years at rate of 10% = 3a.3a a = 33.1 %
Hence, compound interest = 10000 × 33.1% = Rs. 3310.
Q5. Rs.9200 is invested at compound interest at the rate of 25% per annum for 2 years.
Solution.
Normal Method:
Compound interest = P × [(1 + r/100)t – 1]

Compound interest earned = 9200 × [(1 + 25/100)2 – 1] = 9200 × 0.5625 = Rs. 5175
Effective Rate method:

Effective rate = x + y + xy/100 = 25 + 25 + (25 × 25)/100 = 56.25%
Hence, C.I. = 9200 × 56.25% = Rs 5175
Q6. What will be the difference between the compound interest and simple interest on
Rs.3000 at 10% rate of interest for 2 years?
Solution.
D = PR2/104
⇒ D = (3000 × 10²)/10000
∴ D = Rs.30
Installment
Q7. The oven set is bought on 4 yearly installments at 10% simple interest. If equal
instalments of Rs.2500 are made then find the amount to be paid as the price of the oven set.
Solution:
Given rate = 10% and time = 4 years
Let installment be Rs 100

st nd rd th
Then, price = 1 payment + 2 payment + 3 payment + 4 payment = 100 + 110 + 120
+ 130 = 460
Comparing with given installment, we get price, P = 2500 × 460/100 = Rs.11500

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SIMPLE AND COMPOUND INTEREST

Interest is the amount to be paid on the borrowed money or the

Principal The borrowed money or the lent money is called Principal.

Interest can be classified in two types:

Where, P = Principal, r = Rate of interest per year, t = Time period in years

● If rate of compound interest differs from year to year, then

∴ C.I. = A – P = 56180 – 50000 = Rs 6180.

Effective Rate Method

Compound interest = P × [(1 + r/100)t – 1]

Effective Rate method:

Given rate = 10% and time = 4 years

Let installment be Rs 100

Comparing with given installment, we get price, P = 2500 × 460/100 = Rs.11500

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