SIMPLE INTEREST I=Ptr I = Interest Rate P = Principal (the initial amount borrowed or deposited) t = Number of years/months/days the amount

is deposited or borrowed for r = Annual rate of interest (percentage)

Examples

1 Calculate the amount of interest on Rs.8700.00 when earning 3.25% per annum for three years. Answer 848.25

2 Calculate the amount of interest on Rs.4500.00 when earning 9.5% per annum for six years. Answer 2565

3 Calculate the interest when Rs. 6300 is borrowed from March 15th, 2004 until January 20th 2005 at a rate of 8%. HINT:you will not count the day the money is borrowed or the day the money is returned Answer 428.05

4 What's the Interest on Rs.890.00 at 12.5% for 261 Days? HINT:261/365 days is the calculation for the t - time. Answer 79.55

5 What Annual Rate of Interest Is needed for Rs.2100.00 to earn Rs.122.50 in 14 Mths? HINT:use 14/12 for time and move the 12 to the numerator in the formula r=I/Pt Answer 5%

6 What Sum of Money Can you Invest for 300 Days at 5.5% to Earn Rs.93.80? Answer 2075

7 What amount of principal will earn interest of Rs.175.50 at 6.5% in 8 months? Answer 4050 8 How much money do I need (principal) to get Rs.18.20 at 3.25% in 8 months? Answer Rs. 840 9 How many months will it take if I invest Rs.5000.00 at 5% to make Rs.136.48? Answer 0.54592 years or 6.55 months 10 How many years will it take for Rs.745.00 to make Rs.178.80 at 8%? Answer 3 Years

P=I/tr t=I/Pr r=I/Pt

m for three years.

for six years.

anuary 20th 2005 at a rate of 8%.

4 Mths?

8 months?

Rs.136.48?

Simple Interest - Solutions

1 Calculate the amount of interest on Rs. 8700.00 when earning 3.25% per annum for three years. Answer I=Pnr I = 8700 * .0325 * 3 I = 848.25

2 Calculate the amount of interest on Rs.4500.00 when earning 9.5% per annum for six years. Answer I=Pnr I = 4500 * .095 * 6 I = 2565

3 Calculate the interest when Rs. 6300 is borrowed from March 15th, 2004 until January 20th 2005 at a rate of 8%. HINT:You will not count the day the money is borrowed or the day the money is returned.

Answer

First calculate the total number of days for which the money is borrowed, excluding the day of borrowing and the day of return. It comes to 310 days. So, here, n would be, 310/365. I=Pnr I = 6300 * .08 * 310/365 I = 428.06

4 What's the Interest on Rs.890.00 at 12.5% for 261 Days? HINT:261/365 days is the calculation for t - time. Answer I=Pnr I = 890 * .125 * 261/365 I = 79.55

5 What Annual Rate of Interest Is needed for Rs.2100.00 to earn Rs.122.50 in 14 Mths? HINT:use 14/12 for time and move the 12 to the numerator in the formula r=I/Pt Answer r = I / Pn r = 122.5 / (2100 * 14/12) r = 5%

6 What Sum of Money Can you Invest for 300 Days at 5.5% to Earn Rs.93.80? Answer P=I/rn P = 93.8 / (.055 * 300/365) P = 2075

7 What amount of principal will earn interest of Rs.175.50 at 6.5% in 8 months? Answer P=I/rn P = 175.5 / (.065 * 8/12) P = 4050

8 How much money do I need (principal) to get Rs.18.20 at 3.25% in 8 months? Answer P=I/rn $840.00 P = 18.2 / (.0325 * 8/12) P = 840

9 How many months will it take if I invest Rs.5000.00 at 5% to make Rs.136.48? Answer n=I/Pr n = 136.48 / (5000*.05) n = .54592 years or 6.55 months

10 How many years will it take for Rs.745.00 to make Rs.178.80 at 8%? Answer n=I/Pr n = 178.8 / (745 * .08) n = 3 years

r three years.

six years.

ary 20th 2005 at a rate of 8%.

d, excluding the day of borrowing 365.

COMPOUND INTEREST Amount = Principal + Interest A = P(1 + r)^n A = the amount of money accumulated after n years, including interest. P = Principal (the initial amount borrowed or deposited) n = number of years the amount is deposited or borrowed for r = annual rate of interest (percentage) If Interest is paid more frequently: Annually Quarterly Monthly P (1 + r)^1 = (annual compounding) P (1 + r/4)^4 = (quarterly compounding) P (1 + r/12)^12 = (monthly compounding)

P = the principal (current worth) A = the initial amount on deposit r = the interest rate (expressed as n = the number of times per year t = the number of years invested

Formula: A = P (1 + r/n)^nt

A = the amount of money accumulated after n years, including interest. P = Principal (the initial amount borrowed or deposited) r = annual rate of interest (percentage) n = the number of times per year that interest is compounded t = number of years the amount is deposited or borrowed for

If Interest is paid every second ('n' approaches infinity) A = P e^(rt) e is approximately 2.71828

Examples

1 An amount of Rs.5000.00 is borrowed to purchase a car. Find out how much the car will cost if an amou Rs.5000.00 is borrowed at an interest rate of 8% for 4 years. Answer A = 6802.44 and I = 1802.44

2 A sum of Rs. 10000 is deposited in a bank which provides 6% interest rate. Find out the amount that can be earned by t investment with the interest being calculated annually. Answer 10600

3 Another bank promises the same interest rate with the interest being compounded semi-annually. Find the amount that c be earned through this bank. Answer 10609

4 A third bank promises a similar interest rate with but the rate being compounded quarterly. Find the amount that can be earned through this bank.

Answer

10613.64

5 A financial Institution promises a similar interest rate with a monthly compounding of interest. Find the amount that can b earned. Answer 10616.78

6 A businessman needs money and asks for a loan of a similar amount with a similar interest rate. He is in dire need of mo and commits to pay an interest compounded weekly. Find the amount that can be earned at the end of one year if the sa money is lent to this businessman. Answer 10618

7 Find the amount that can be earned if the same amount at the same interest rate is compounded daily. Answer 10618.31

8 What would happen if the interest rate is compounded every moment? Answer 10618.37

er n years, including interest.

P = the principal (current worth) A = the initial amount on deposit r = the interest rate (expressed as a fraction: ex: 6% = .06) n = the number of times per year that interest is compounded t = the number of years invested

er n years, including interest.

out how much the car will cost if an amount of

rate. Find out the amount that can be earned by this

ompounded semi-annually. Find the amount that can

mpounded quarterly. Find the amount that can be

mpounding of interest. Find the amount that can be

with a similar interest rate. He is in dire need of money that can be earned at the end of one year if the same

terest rate is compounded daily.

Compound Interest - Solutions

1 An amount of Rs.5000.00 is borrowed to purchase a car. Find out how much the car will cost if an amount of Rs.500 borrowed at an interest rate of 8% for 4 years under compounding policy. Answer A = P(1 + r)^n A =5000*(1.08)^4 A = 6802.445 Interest = Amount - Principal I = 6802.445 - 5000 I = 1802.445

2 A sum of Rs. 10000 is deposited in a bank which provides 6% interest rate. Find out the amount that can be earned investment at the end of one year with the interest being calculated annually. Answer A = P(1 + r)^n A =10000*(1.06)^1 A =10600

3 Another bank promises the same interest rate with the interest being compounded semi-annually. Find the amount be earned through this bank at the end of one year . Answer A = P (1 + r/n)^nt A = 10000*(1+.06/2)^(2*1) A = 10609

4 A third bank promises a similar interest rate with but the rate being compounded quarterly. Find the amount that can earned through this bank at the end of one year . Answer A = P (1 + r/n)^nt A = 10000*(1+.06/4)^(4*1) A = 10613.64

5 A financial Institution promises a similar interest rate with a monthly compounding of interest. Find the amount that c earned at the end of one year . Answer A = P (1 + r/n)^nt A = 10000*(1+.06/12)^(12*1) A = 10616.78

6 A businessman needs money and asks for a loan of a similar amount with a similar interest rate. He is in dire need and commits to pay an interest compounded weekly. Find the amount that can be earned at the end of one year if th money is lent to this businessman. Answer A = P (1 + r/n)^nt A = 10000*(1+.06/52)^(52*1) A = 10618

7 Find the amount that can be earned at the end of one year if the same amount at the same interest rate is compou daily. Answer A = P (1 + r/n)^nt A = 10000*(1+.06/365)^(365*1) 10618.31 A = 10618.31

8 What would happen at the end of one year if the interest rate is compounded every moment? Answer A = P e^(rt) A = 10000*2.71828^(.06*1) A = 10618.37

e car will cost if an amount of Rs.5000.00 is

d out the amount that can be earned by this

ded semi-annually. Find the amount that can

d quarterly. Find the amount that can be

ng of interest. Find the amount that can be

milar interest rate. He is in dire need of money be earned at the end of one year if the same

at the same interest rate is compounded

very moment?

Additional Problems

1. What is the better way to invest Rs.100 for ten years: at 5% simple interest, 4.8% interest compounded 4.6% interest compounded annually? Does your answer change if the investment lasts 100 years?
SI for 10 years CI for 10 years compounded monthly compounded annually 50 65 57 500 14588 8878 N Y N N Y N

SI for 100 years CI for 100 years

compounded monthly compounded annually

2. If you invest some money at 8% annual compound interest for five years and end up with approximatel how much (to the nearest Rs.10) did you originally invest?
Principal = 152

3. What is the difference between investing Rs.1000 for five years at 6% simple interest, 6% interest comp quarterly, and 6% interest compounded monthly?
SI CI CI compounded quarterly compounded monthly 300 347 349

t, 4.8% interest compounded monthly, or ment lasts 100 years?

nd end up with approximately Rs.223,

ple interest, 6% interest compounded

EMI Problems

Equated Monthly Instalments

Present Value Interest of a Future Annuity at rate r and n period PVIFA r,n = [(1+r) ^ n 1 ] / [r(1+r) ^ n ] A = FVAn / { [ (( 1+r)^n) - 1 ] / r } Examples

1 If a person wants to buy a house after 5 years when it is expected to cost Rs. 20 lakhs, how much should the person sav anually if the savings earn a compound return of 12 percent? Answer 314819.5

2 Shyam borrows Rs. 80,000 for a musical system at a monthly interest of 1.25%. The loan is to be repaid in 12 equal mo instalments, payable at the end of each month. Caculate the EMI. Answer 7220.665

3 What is the effective interest rate in the above case? Answer .69 percent

4 If a person lends Rs.10,000 and receives an EMI of Rs. 2,500 annually for 6 years. What is the interest rate that the pers earns on this lending? Answer 13 percent

5 What is the effective interest rate in the above case? Answer 8.33 percent

6 Assume that in the above case the borrower defaults in the payment during the fourth year and pays regularly afterwards Thus, the payment goes beyond the agreed due date, upto the fifth year. What would be the interest rate in this case? Answer 16 percent 2836.788 7 What is the effective interest rate in the above case? Answer 7.14 percent

8 Consider a case wherein a purhaser of a Refrigerator, costing Rs.35000, pays an initial lumpsum of Rs.5,000 during the purchase. He agrees to pay the rest of the money in 12 equal monthly instalments, at an interest rate of 2 percent per m Calculate the EMI. Also find, what is the effective rate of interest that the vendor gets at the end of the year? Answer EMI = 2836.788 Eff.Int.rate 0.962251 percent per month

EMI = N / [(1+r) ^ n 1 ] / [r(1+r) ^ n ]

ost Rs. 20 lakhs, how much should the person save

of 1.25%. The loan is to be repaid in 12 equal monthly

y for 6 years. What is the interest rate that the person

during the fourth year and pays regularly afterwards. ar. What would be the interest rate in this case?

00, pays an initial lumpsum of Rs.5,000 during the instalments, at an interest rate of 2 percent per month. he vendor gets at the end of the year?

EMI - Solutions

1 A = FVAn / { [ (( 1+r)^n) - 1 ] / r } = = 2000000 / { [ (1.12^5) - 1] / 0.12} 314819.46

EMI = N / [(1+r) ^ n 1 ] / [r(1+r) ^ n ]

= = 80000/ { [ (1.0125)^12-1 ] / [ 0.0125*(1.0125)^12 ] } 7220.665

PVIFA r,n = [(1+r) ^ n 1 ] / [r(1+r) ^ n ]

3 The total interest earned during the period of 12 months is Rs. 6648. (7220.665*12)-80000 = 6648 This is 8.3 % of the total amount lent. 6648/80000 = 8.3 percent Hence, the effective monthly interest earned is, 8.3/12 , I.e., .69 percent.

4 PVIFA r, 6 = 10000/2500 = 4 Find in the table the column corresponding to the PVIFA at 6 years with an approximate value of 4. That is at 13 % Therefore, the effective interest rate the lender gets is 13 %.

5 The total interest earned during the period of 6 years is Rs. 5000. (2500*6)-10000 = 5000 This is 50 % of the total amount lent. 5000/10000 = 50 % Hence, the effective annual interest earned is, 50 / 6 , I.e., 8.33 percent.

6 PVIFA r, 7 = 10000/2500 = 4 Find in the table the column corresponding to the PVIFA at 7 years with an approximate value of 4. That is between 16 and 17 percent. As the value with interest 16% is nearer to 4, we can assume the interest rate to be around 16%.

Therefore, the effective interest rate the lender gets is 16 %.

7 The total interest earned during the period of 7 years is Rs. 5000. (2500*6)-10000 = 5000 This is 50 % of the total amount lent. Hence, the effective annual interest earned is, 50 / 7 , I.e., 7.14 percent.

8 The actual amount due is Rs.30000. EMI = 2836.7879 The EMI therefore, is, Rs.2837. The total interest amount paid during the period is, 0.958333 (2836.788*12)-30000 = 4041.456 4041/35000 = 11.5% This is 11.5 % of the total amount lent. Hence, the effective monthly interest earned is, 11.5 / 12 , i.e., .96 %

= [(1+r) ^ n 1 ] / [r(1+r) ^ n ]

oximate value of 4.

oximate value of 4.

, we can assume the interest rate

d is, 50 / 7 , I.e., 7.14 percent.

ned is, 11.5 / 12 , i.e., .96 %

APR

Annual Percentage Rate

For example, let's say you borrow Rs.100,000 for a 30-year mortgage loan and Lender A is charging you an in 7%. Lender A however, will charge you Rs.2,000 in fees for the loan. Since you would have to pay Rs.2,000 Rs.100,000, you are really only increasing your cash position by Rs.98,000 (100,000 - 2,000). However, you a loan payments based on a Rs.100,000 loan, so your 'effective interest rate' (Annual Percentage Rate) will be hi stated rate on your loan. In this instance the Annual Percentage Rate (APR) would be 7.202%.

Lender B also offers a 7% interest rate, and does not charge any fees. Instead Lender B would require you to p point is one percent of the loan amount, in this case 3%. Since 3% of Rs.100,000 is Rs.3,000, you would only cash position by Rs.97,000 (100,000 - 3,000), but would still have to repay a Rs.100,000 loan. In this case you Percentage Rate (APR) would be 7.305%. In this situation Lender A has the better deal since an APR of 7.202 than an APR of 7.305%.

tgage loan and Lender A is charging you an interest rate of e loan. Since you would have to pay Rs.2,000 in order to get Rs.98,000 (100,000 - 2,000). However, you are still making erest rate' (Annual Percentage Rate) will be higher than the Rate (APR) would be 7.202%.

fees. Instead Lender B would require you to pay 3 points (a % of Rs.100,000 is Rs.3,000, you would only increase your ve to repay a Rs.100,000 loan. In this case your Annual er A has the better deal since an APR of 7.202% is lower