20 | compound INTEREST COMPOUND INTEREST ; . rete When interest due atthe end of each tse pata i 0 pea ag ineipal and the « obtained a X i ween a ce fe toto th original pina baton the new rina which i the moun tthe no period. In such a case the principal increases from perio’ to pe i sat ee stor each period is the interest on the sum at the preceding period. This interes ie led compound interest. Thus, under compound interest, interest is charged not only on principal py on interest also. The total sum owned after a given time is called the amount of compound interest for that time. After certain period, the difference between the amount and the original principal in callea the compound interest (i.e., C1 It should be noted that in compound interest it is assumed that the interest due at the end of each period is not paid by the borrower, but is retained by him as a further loan and is added to the principal. DIFFERENCE BETWEEN COMPOUND INTEREST AND SIMPLE INTEREST The main points of difference between S.I. and C.I. are as under : (i) Calculation of Interest : Simple interest is calculated on the ‘inal principal, whereas compound interest is calculated on the principal at the beginning of the period concerned. (ii) Principal : Principal remains constant throughout the period in case of simple interest; whereas in compound interest principal is variable; principal goes on increasing in every period. (iii) Nature of Interest: In case of simple interest, the amount of interest remains the same in every period, whereas in case of compound interest the amount of interest varies from one period to another; the amount of interest goes on rising in each period. (iv) The amount of simple interest is always less than that of the compound interest. (v) Generally simple interest is calculated per annum, whereas compound interest may be calculated annually, half-yearly, quarterly or even monthly, Some Important Formulae Let, A = Amount, i= 100 P = Principal, C.L = Compund Interest Rate % paa. Number of years or periods 1. When interest is compounded yearly 2 y ‘Amount (A) = (+5) or PUL + ay" 196 Applied Mathematies-X! (Volume 2)2n 2, When inte st is compounded half-yearly A = pl 14-2 I an r 3, When interest is compounded quarterly A = i, a] 100 4, Compound Interest = Amount (A) — Principal (P) 5. When rate of interest is 7%, r3% and r3% for Ist, 2nd and 3rd year respectively, then: n) Gon = P| wit) x 42) ae i ( 100 [ 100) \'* i00 6. When time is a fraction of a year, say 2> years, then, 4 7 y | ‘ = Pii+— 4 Amount (A) ( +700) *U+ito 7. If a sum x is payable after n years at r% paa., then x Present Value = = ,y 5) ( 100 8 The difference between compound interest and simple interest on & P for 2 years at 1% pau, is given by : 2 p Difference = P a) 9. The difference between compound interest and simple interest on & P for 3 years at 7% p.a. is given by : erence = P (2) (+3) Difference = P| 755} (Too 10. If a loan amount P at r% per annum compound interest is paid back in» annual equal instalments, each instalment being x, then 2 7 a - 100 100 100 ye ( 100 J pee (ase) *(ooea] +lions “Uo0+r Compound Interest —————~ 197METHODS OF CALCULATING COMPOUND INTEREST Compound interest may be calculated by either of the followin 1, Direct Method or Simple Method 2. By using Formula 3+ By using logarithmic tables CALCULATION OF COMPOUND INTEREST BY DIRECT MI Compound Interest ~ Final Amount ~ Original Principal In short, C.l. = A~P Note The compound interest might also be obtained by adding together the interest forthe first year, interest for the 2nd year, interest for the 3rd year and so on. 1g methods = JETHOD Interest payable Yearly Example 4 : Calculate compound interest on % 1,000 for 3 years @ 5% per annum, Solution : z 1,000 Principal for Ist year 1,000%5 50 Add : Int I ( 100 ) 71050 Principal for 2nd year Add : Interest ( 20505 52500 00 1,102.50 Principal for 3rd year Add : Interest (eens) 55.125 Amount 1,157.625 Less : Original capital 1,000.000 Compound interest 157.625 Hence, the required compound interest = & 158 Interest payable Half-yearly or Quarterly or Monthly (a) If the interest is payable half-yearly the result may be obtained by finding the interest for double the number of years at the half rate per cent. (b) In case of quarterly interest, period shall be four times of the years and the rate pet cent shall be reduced to one fourth. (©) When interest is calculated monthly, divide the rate per cent per annum by 12 and multiply the number of years by 12. Example 2 : Calculate the compound interest on %600 for 2 interest 1% p.a., the interest being payable half-yearly. ee ee Solution : Time = 2 years, so no, of periods = 2 x 2 = 4 6 Rate = 6% p= 5 % per half year = 3% per half year 198 7 TT §§£§ Applicd Mathematics-X1 (Volume 2)= 600 Princi Tiieaavin © eov'avan rincipal for the first half year 618 Principal for the 2nd half year Interest on 7618 @ 3% 18.54 636.54 Principal for the 3rd half year Interest on 7636.54 @ 3% 19.0962 655.6362. Principal for the 4th half year Interest on % 655.6362 @ 3% 19.6691 675.3053 Amount at the end of 4 half-years or 2 years Less : Original principal 600.0000 75.3053 .. Compound interest = 775 Calculation of Amount and Compound Interest when the number of years is not an integer Example 3 : Find the amount and compound interest on & 850 in 34 years at 4% p.a. Solution : z 850 Principal for the Ist year Interest on & 850 @ 4% 34 884 Principal for the 2nd year Interest on & 884 @ 4% 35.36 91936 Principal for the 3rd year Interest on & 919.36 @ 4% 36.7744 956.1344 Principal for the 4th year Interest on % 956.1344 @ 2% (ie, for + year) 19.1227 : 2 975.2571 Amount at the end of 35 years Less : Original principal 850.000 125.2571 Compound interest Amount = % 975, Cl. = & 125 Difference between Compound Interest and Simple interest Example 4: Find the difference between simple and compound interest on %5,000 invested Sor 4 years at 5% p.a., interest payable yearly. R._ 9 5,000x4%5 Solution : Simple Interest = “]o9 Sa aangeis: =% 1,000 199 Compound intakes eeCompound Interest . 5,000 Original Principal Plus : Interest (isms a sams) 250 5250 Principal for 2nd year Plus : Interest (25) 262.50 551250 Principal for 3rd year « 5,512.50x5 Plus ; Interest (eae — ) pe 5788125. Principal for 4th year Plus ; Interest (= 125% ;) 289.4063 oo 607.5313 ( Original Principal 5,000.00 Compound Interest 1,077.5313 Difference : Compound interest 1,077.53 (©) Simple interest 1,000.00 Difference 71.33 Hence, the required difference = % 78 To Find out Principal and Rate% Example 5 : What sum at compound interest will amount to €650 at the end of the Ist year and % 676 at the end of the second year? Solution : Amount at the end of Ist year = % 650 ‘Amount at the end of 2nd year % 676 Interest on % 650 for | year % 676 — % 650 = % 26 _ 26x 100 Rate % ~~ 4% pa. ‘Now interest on € 100 in one year = & 4 Amount at the end of Ist year = %100+%4=% 104 When = Amount Principal 104 t 100 oo P zg ecto = 025 Sum = % 625 Example 6 : What sum of money will earn compound interest of € 1,261 in 3 years at 5% p.a.? a 200 ——________________ applied Mathematics- x! (Volume 2)golution : Let principal = % 100 zg 100 Principal for Ist year Interest @ 5% 5 105 Principal for 2nd year Interest @ 5% 5.25 110.25 Principal for 3rd year Interest @ 5% 5.5125 Amount 115.7625 © Principal 100.0000 Compound interest 15,7625 Now, when Compound interest Principal 15.7625 100 1,261 P 1,261x100 Bee 15.7625 ~ © 8,000 ©. Principal = % 8,000 CALCULATION OF COMPOUND INTEREST BY USING FORMULA Compound interest may be calculated easily with the help of formula. IfP be the principal r, the rate % of interest per annum, n, the number of years. -y Then, A = P[1+—— . ( ins) r or A =P (I+i)", where = 755 Pxr 100 Proof : Interest for the Ist year Pxr P(i+— Amount at the end of Ist year = P + 00” *t00. r Now, for the second year, the interest is on the amount (45) 2 r r r <. Amount at the end of the 2nd year = (Se) ry Amount at the end of the 3rd year = of +5) ry And amount at the end of years = of +5) Thus, A = a) lus, A. o(i 100 And compound interest = A - P = ( Compound interest ————$ = 02| | | Example 7 : Find the amount and compound interest of % 3,500 in 3 years at 9% pa é tee | Solution : Here, p = & 3,500, n = 3 years, r = 9% p.a. So, A= of +5) 9y 109 = = 3,500( 1+ 3,500} ey ('+55) . (2) 26 fan 100 100 100 4,53,26,015 10,000 Compound interest = & 4,532.60 — % 3,500 = 1,032.60 Amount = & 4,533, Cl. = & 1,033. Example 8 : Calculate the amount and the compound interest on 8000 for 2 years 9 months at 10% p.a. compounded annually. Solution : Here, P = %8000, r = 10% p.a. =F 4,532.6015 = & 4,532.60 = 2 years 9 months = 2 3 years = 23 months. nacre) 100 4 10 3x10 = 120 8000 ( + icy x45) pm xil, Wy BL = 8000 « 75 75 * Zo = %10406 Hence, amount = 710,406 and CL = A— P = %(10,406 — 8000) = 22,406 When Interest is Compounded Half Yearly Example 9 : Find the compound interest on & 1,250 for 4 ‘years at 5% p.a., if interest is payable half-yearly. Solution : When interest is payable half-yearly 1," A= oft) 100 Given : P = & 1,250, n= 1s r= 5% pa. 2 God Dau neo Ree = HJ = 25%, n= 2x5 =3,CL =? Now, A = of 28) =, 250%{ 2S west 102.5, 102.5 , 102.5 =@ 1,250 a Xe . S100 F100. 100 * CL=A-P = 1346 ~ & 1,250 = 796 202 Applied Mathematics-x! (Volume 2)fo find out Amount when Interest is Compound Quarterly example 10 : Find the amount and i : compound interest of & 10,000 in 15 years at 1 pa interest being due quarterly, : a 1 jution : P= & 10,000, np = 1= = a 1 50l es 2 ~4=6,r= 16% x 4 = 4% per quarter, A=? Pil x 4¥ = gre Now, A a #10,000( 4) 104)° =f 10.00 (58) =& 10,000 x 104, 104, 104 104. 104 104 100 100” 100 * 100 * 100% 100“ 100 ~ * 17°? «A= 12,653 and CL = A~P =Z (12,653 ~ 10,000) & 2653 To find out Rate of Interest when C.l. is given | Example 11 : If the compound interest on a certain sum for 2 years at 4% is € 102, what would be the simple interest at the same rate for 2 years? | Solution : Let principal (P) = & 100, i 2 A=P (1+ i =F 100 (1 + 0.04)? =F 100 (1,04? =F 108.16 Compound interest (CL) = A - P= & 108.16 —& 100 = € 8.16 PXTXR _¢ 100x2x4 Simple interest (SL) = —qqy mex =e 8 Now, when CL. SIL 8.16 | 8 102x8 = eX = 100 102 x ae 7100 Hence, the required S.1. = + per annum for a sum that becomes B of itself in Example 12 : Find the rate of interes! one year, compounded half-yearly. Solution : Let r% be the rate of interest per half year. 729 A= = = 2 half years 22 Pn = 1 year y a k=P (+5) 100 oe v=o 1455) > 625 100 2 0 2 27 r Wepre =(Z) -(1+5) 255 oo 100 25 Hence, rate of wet ee Compound Interest | => r= 8% per half year. |To Find out Principal Example 13 : What swm will earn compound inte ion : =p|{1+—| -1 souton: cx -el(-55)-H woe fo) ]omef rest of © 168 in 2 years at 10% pay uu 121 2 100x168 _ =P{—x—-1 = p(22t_1)-px 2 = p= ——— = 800 => 168 (8 7 = 168 (2 ') PxaE = 21 Hence, the required sum = 800 Example 14 : 4 money lender borrows certain sum of money at 3% p.a. simple interest and invests the same at 5% per annum compounded interest (compounded annually). Afier 3 years he makes a profit of € 1,082. Find the amount he borrowed. Solution : Suppose the money lender borrows %100. 100x3x3 _g 100 ©. Interest on & 100 at 3% p.a. for 3 years = & 9 Thus, & 9 is the cost of borrowing. Now, he invests € 100 at 5% p.a. compound interest for 3 years. ry 5) A=P _} = & 100/1+—] == 100 (1+0.05)5 (+5) ( iw) Mahe or = & 100x(1.05)? = & 115.7625 <. Compound interest = A — P = & 115.7625 ~ & 100 = & 15.7625 :, Profit of the money lender = & 15.7625 ~ & 9 = % 6.7625 Now, when Profit Amount Borrowed z 6.76254 = 100 & 1,082 P 1082x100 _ . P=% E7696 ~ 16,000 Hence, the amount borrowed = %16,000 Example 15 : The difference between the simple interest and the compound interest on @ sum of money for 3 years at 10% p.a. is %558. Find the sum. Solution : Let the sum be P. _ Px10x3 _ 3P Then, SI. for 3 years = 99 = 7g -i) ign | Cl. fe =P |[l+— | -1 | for 3 years ( +5) | ny 1331-1000) 331P = —| -1)=Px| ——— |= —_ em ol(i3) | ( 1000 ] 1000 +i) 204 Applied Mathematics- x! (Volume 2)Difference between C.1, and SI a SP _ G31~300)P _ 31P 000-10 But, CL. ~ Si. = 558 {Given} on Teal sip. 558% 100 558 => pw 5S 00 = To00 nt 31 Hence, the required sum is 218,000, WISCELLANEOUS EXAMPLES Example 16 : Mr. Marandi two annual equal instalments, 18000, borrowed % 50,000 at 5% p.a. compound interest to repay in Find what will be the amount of each instalment. Solution : Let cach instalment be of Zx, 100 ( 100? Then. Go0+7)"* Looe} * = Sum borrowed = xo( 20, = 50,000 > (00+5)** 00s ) * > ° A — taf 10) 100 — (1 i = ime +(2) x = 50,000 => “9g (!* 195 | = 50,000 100s 205 50,000 3 2x At = Tos jos ~ 50.000 = Sx 5 = 50,000 820x 50,000x441 Saal a 50,000 => x = e290 = 26,890.24 :. Annual instalment = & 26,890 Example 17 : A man borrowed some money to repay in three equal annual instalments of % 9,261 each at 8% p.a. compound interest. Find out what sum of money had he borrowed. Solution : Amount paid at the end of Ist year = & 9,261 ,Y Amount = I {1+ jount = Principal ( a] 1 5). 2s) +: 9,261 = (+5) =?(ie ee oie = %8,820 This is the principal which amounts to & 9,261 at the end of the Ist year Similarly, second instalment = = 9,261 5 P_,(105)° Now, 9,261 = (+55) -°( 5) 100 100 e 100, 100 _ & 8,400 =>P 9,261 x Toe X 195 z8, This is the principal which amounts to © 9,261 in two years. Similarly, third instalment = 9,261. 205 Comppouind interest tesy S Pilt— So, 9,261 ( <| 100 | 100 . 100 + pa 9,261 x xX X= =F 8,000 ie 10s “10s “10s ~* © : This is the principal amount which amounts to € 9,261 in three years. Therefore, total amount borrowed = & 8,820 + & 8,400 + & 8,000 = & 25,220 Alternate method Here, each instalment = 9261, n = 3 years, r = 5% Let sum borrowed be @ P. 100 100° (100) 7 F| 9261 Then =P [its aets) (4) os 100), 00 (100) 1 to5|'* 105 “(10s = 9261 x 100 1261 _ 95029 105° 441 = Hence, the sum borrowed = 25220. Example 18 : In what time will the interest of % 10,000 be & 1,576.25 at 5% per annum compounded annually? - tion : = Pi} l+— | -1 => 1,576.25 = soo (+S : ( 5 y ak 576.: aoe +b 576.25, => |[1+—] -1 = 100 10,000 +0 * 10,000 - " _ 11,576.25 =(%J- — 157,625 e 100 = (2) 24 10,000 ~ 10,00,000 sas (2) 8 9,261 ~ 8,000 21)" 21 = (2) ay =n3 Time = 3 years Example 19 : Find the compound interest on %1,00,000 fo . for 2 years, th interest igh pe ann br Oe ee eh ee Solution : P = @ 1,00,000, r; = 10, r. = 8, Cl. A a Applied Mathematics- x1 (Volume 2)ul & Aye of i.) ( 7s) % 1,00,000 (+2) x (142 AF 1,00, 100 Fn ll. 27 ace (100.000. F5 <2) =% 118,800 .. Compound interest = &1,18,800 — %1,00,000 = 18,800 Example 20 : A certain amount becomes = 23,328 in 2 years at compound interest and it becomes © 21,600 in 1 year: Find how much it would become in 3 years. Also, find the total interest on the same amount at the same rate of simple interest for 3 years. Solution : A = % 23,328, P=@ 21,600, T = 1 year 23,328 - 21,600 — 1728x100 Seo *100 = ~s1600 78% Pa Now, principal of the 3rd year = &23,328.00 Add : Interest 7 = F1,866.24 100 ees Amount at the end of 3rd year = 25,194.24 . | _ PxTxR Now, simple interest = joo Simple interest = 21,600 - P, T= 1 year, R= 8% pa. 21,600 100 _ » 21,600x100 +. Principal = (i998) “© tog ~ €20,000 20,000 x83 =f = 54,800 2 slat Alternatively : wo pe A we 2 Ong 21,600 100 = = 20,000 5 8 108 (1 +5 16 100 20,000x3%8 +. Simple interest on & 20,000 @ 8% pa. for 3 years = % —— 9g = %4,800 Example 21 : £16,896 is to be divided between two persons Luv and Kush, who are respectively 18 years and 19 years old in such a way that if their shares be invested at 6.25% per annum compound interest, they shall receive equal amounts on attaining the age of 21. How the sum be divided and how much will each receive when 21 years old? Solution : Let Luv’s share = @ x - Kush’s share = & 16,896 — *) 628) a . Amount for Luv = x(1+$55 207 ‘Connpinundl interest, <2 eee aaAnd amount for Kush = (16,896 — x) (1 + According to the question Lav’s amount = Kush’s amount > =x uy = (16,896—x)( 12) = x42 = 16,896 - x 16 16 => IT = 16 * 16,896 ~ 16x = 17x + 16x = 2,70,336 2,10;536 33 Thus, Luv’s share = 8,192 And Kush’s share = £16,896 ~ 8,192 = %8,704 => 33x = 2,70,336 x= = 8,192 Luv’: it at th of 21 = F8,192 x wy 8,192 17 117 79,826 a wea (12 eg90 a el = 17 8704x1717 Kush’ it at of 21 = F 8,71 =| =%——— _ = 79,826. Example 22 : A man borrows %5800 at 12% p.a., compounded semi annually. He pays %1800 at the end of every six months. Calculate the amount outstanding at the end of the third payment. Solution : Rate of interest = 12% p.a. = 6% per half year. Amount at the end of Ist six months = %5800 ( + st) = %6148 100. Amount paid back = 71800. So, principal for next (2nd) six month %(6148 — 1800) = %4348. Amount at the end of 2nd six months (I year) = 54348 (: + 1) = %4608.88 Amount paid back = 71800. So, principal for next (3rd) six months = %(4608.88 — 1800) = %2808.88 Amount at the end of third six months = %2808,88 ( + wm) - meT74t Amount paid back = 71800. So, amount outstanding at the end of third payment = %(2977.41 — 1800) = R117741 = 81177. eee . Find the compound interest on & 1,000 for 4 years at 5% p.a, . Find the compound interest on 10,000 for 3 years at $% p.a, - What principal will amount to ® 5,324 in 3 years at 10% p.a. compound interest? |. What principal will amount to 14,641 in 4 years at 10% p.a. compound interest? aere 208 Applied Mathematics -XI (Volume 2)