Tuesday, 18 April 2017

Interest I - How to Calculate Interest? - For IBPS PO Exam

If calculating interest gives you nightmares, then this post is definitely for you, where we discuss the basics of Simple Interest and Compound Interest along with some examples for IBPS PO Exam. 

How to Calculate Interest

Questions on how to calculate interest, both- simple interest and compound interest, always find their way in competitive exams such as IBPS PO, SSC Exam. Having a thorough understanding of this concept will help you score more and save time.
Let’s start with discussing the basic idea of Simple Interest and Compound Interest along with different methods used to solve questions based on them.

What is Interest?

Interest can be defined as the money paid at regular time intervals, at a particular rate for the use of lending cash, or for delaying the repayment of a debt.
It is the extra amount earned or paid over the money lent or borrowed.
Before we discuss about how to calculate interest, let us see what are the different parameters that affect interest.


Elements of Interest.


How to Calculate Interest
How to Calculate Interest
How to Calculate Interest
How to Calculate Interest



How to Calculate Interest Using the Formula

There are two ways in which interest is calculated- Simple Interest and Compound Interest.                            

1.Simple Interest.

Simple Interest can be the defined as “the interest earned on the principal amount for the given time period.”
Simple interest is calculated on principal regardless of the interest earned during the course of time. The principle remains constant.Simple Interest is calculated annually.

How to Calculate Interest

Example of a Question on How to Calculate Interest.

Problem: Manoj takes a loan of 1000 rupees to buy a used truck at the rate of 10% p.a.
Calculate the annual interest to be paid for the loan amount at the end of two years.

Solution:
Step 1:  P- 1000
              T - 2
              R - 10% per annum
Step 2: Simple Interest = PTR/100    

Step 3: Simple Interest = (1000 x 2 x 10)/100

Step 4: Simple Interest =  20000/100

Step 5: Simple Interest = 200

So, the total amount that Manoj has to pay at the end of two years.

Step 6:Amount = Principal + Simple Interest
            Amount = 1000 + 200 = 1200

Therefore, Manoj has to pay Rs 1200 at the end of 2 years.

How to Calculate Interest

2.Compound Interest.

Compound Interest can be defined as the interest that is calculated on the principal and the interest on principal which is added every year.
In compound interest the principal doesn’t remain constant. It varies as the interest is added to it every year. Compound interest is paid at the end of the given time period.

How to Calculate Interest

Example of a Question on How to Calculate Interest.


Problem:Find the compound amount which would be obtained from an interest of Rs.1000 at 10% compounded yearly for two years.

Solution:
Step 1:      P = 1000
                  T = 2
                  R = 10%

Step 2:  Compound Interest (1)  = 10% of 1000                   
                                                    =  100

Step 3:  Compound Interest (2) = 10% of [1000 + 100 ( previous year interest)]
                                                   = 10% of 1100
                                                   = 110

Step 4:  Compound Interest = Compound Interest (1) + Compound Interest (2)   
                                              =   100 + 110
                                              =    210

Let’s solve the question using the formula.

Step 1: Compound Interest P [{(1+ R)/100}ⁿ-1]

Step 2: Compound Interest = 1000[{(1+10/100}²-1]   

Step 3: Compound Interest = 210
So the total amount at the end of two years,
Step 4: Amount = Principal + Compound Interest
             Amount = 1000 + 210  = 1210 

Therefore, Manoj has to pay Rs.1210 of total amount at the end of two years.

So, having said that if you have a credit card and you owe money on it, you will pay less interest if the credit card company uses simple interest and more money if the company calculates through Compound Interest.


Learn from our expert faculty how to calculate interest without using the formula.


Simple Interest Vs Compound Interest                                                              

Criteria
Simple Interest
Compound Interest

Meaning

Simple Interest refers to an interest that is calculated as a percentage of a principal amount
Compound Interest refers to an interest which is calculated as a percentage of principal and accrued interest.

Principal

Constant
Keeps changing at regular intervals during the time period

Returns

Less
Comparatively Higher

Interest charged on

Principal
Principal +  Accumulated Interest

Growth

Remains uniform
Increases Rapidly

Intensity

Simple
Complex

Formula

 PTR/100  
 P [{(1+ R)/100}ⁿ -1]
Now, that you know how to calculate interest, it's going to be a cakewalk to solve questions that appear on how to calculate simple interest and compound interest. Also you will easily be able to solve questions on how to find the amount, principal, rate of interest or the time period that was taken to return the money by just substituting the values in these formulas.
Stay tuned for more on this! Do let us know if this blog was helpful to you in acquiring all the basic information about Simple and Compound Interest. 

In our next post, we will talk about How to Calculate Interest-both simple and compound interest in minimum time.

How to Calculate Interest

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