EQuality Education System

Compound Interest

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EQuality Education System
EQuality Education System

Compound Interest is calculated on the principal plus
the interest on the principal.

i.e. the amount at the end of the first year will become
the principal for the next year and so on.
CI = A P


Equation (1)

Compound Interest
EQuality Education System
EQuality Education System
In the above formula , r is the annual rate of interest
and n is the number of years for which the interest is
charged. But if the compounding takes place more
than once in a year then both r and n will change.

If compounding is done half yearly , then

Equation (2)
Multiple Compounding Interest
EQuality Education System
EQuality Education System
If compounding is done Quarterly , then


Equation (3)

When interest is compounded Annually but time is
in fraction, say 2
2
5
years.

..Equation (4)

Note: Effective rate of interest is the rate of interest which will earn the
same SI in one year as the CI earned at a specified nominal rate of interest.
EQuality Education System
EQuality Education System
When compound interest Rates are different
for different years, say R1%, R2%, R3% for 1st,
2nd and 3rd year respectively.






Equation (5).
EQuality Education System
EQuality Education System

If the principal P is repaid in 'n' equal
installments in 'n' years, then the sum of the
present values of each installment will be P.



Equation ( 6)


Equal Installments
EQuality Education System
EQuality Education System



If the value of an article is P at a certain time
which depreciates at r% p.a. then the price at
the end of n years is



..Equation ( 7)





Depreciation of Value
EQuality Education System
EQuality Education System
Q: At what rate of compound interest per annum will
a sum of Rs. 1200 become Rs. 1500 in 2 years?

Solution: Let the rate be R% p.a.
Given that P= 1200 ; Amount = 1500 n= 2 so ,
1500 = 1200 (1+0.01r)..............using equation (1)

So Rate of interest = 11.8 %
Examples
EQuality Education System
EQuality Education System
Q: Raju purchased motor with an amount of Rs. 6000
with the depreciation rate of 5 % . After 2 years what
will be the value of motor ?

Solution : Present value= 6000 Rate of depreciation =
5% n=2
For calculating future value with depreciation use
equation (7)
Future Value = 6000 {[1-5/100]^2}
Future value of the motor will be Rs. 5415
EQuality Education System
EQuality Education System
Q:The effective annual rate of interest corresponding
to a nominal rate of 5% per annum payable half-
yearly is:

Solution: Assume amount investing is 100
Given here r= 5% ; so put all the values in equation (2)
Then for half yearly compounding; amount = 100
{[1+(2.5/100)]}
Amount after half yearly compounding = 105.0625

So effective rate = (105.0625 - 100 ) = 5.0625 %
EQuality Education System
EQuality Education System
Q:If the simple interest on a sum of money for 2
years at 5% per annum is Rs. 60, what is the
compound interest on the same at the same rate
and for the same time?

Solution : From simple interest we will calculate the
present value
Sum= ( 60 100)/(25)= Rs. 600
Now by applying compound interest in present value
of 600 for 2 years with 5 % rate
Amount = 600 {(1+0.05)} =661.5 Rs
So, Compound Interest = 661.5 - 600 = Rs. 61.5
EQuality Education System
EQuality Education System
EQuality Education System
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