Quantitative Aptitude Topic of the day: Simple Interest (SI) and Compound Interest (CI)
Simple Interest and Compound Interest are the most famous topic of any bank exams especially IBPS PO. Since questions are more or less similar to the coaching done these questions take the least time and have a accuracy rate of 90-100%. The key to solving simple and compound interest questions is to remember the formulae, understand the question and apply the relevant formula and get the correct answer.
The cost of borrowing money is defined as Simple Interest. It is of two types – simple interest or compound interest. Simple interest(SI) is calculated only on the principal (P) whereas Compound interest(CI) is calculated on the principal and also on the accumulated interest of previous periods i.e. “interest on interest.” This compounding effect makes a big difference in the amount of interest payable on the principal.
Simple interest is:
Simple Interest = Principal x Interest Rate x Term of the loan(Time of Loan)
SI = P x i x n/100 when interest rate is taken in percent.
CI = P [(1 + i)n – 1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods.
Compounding periods : When calculating compound interest, the number of compounding periods makes a significant difference. The basic rule is that the higher the number of compounding periods, the greater the amount of compound interest. So for every INR 100 principal over a certain period of time, the amount of interest accrued at 10% annually will be lower than interest accrued at 5% semi-annually, which will in turn be lower than interest accrued at 2.5% quarterly.
In the formula for calculating compound interest, the variables “i” and “n” have to be adjusted if the number of compounding periods is more than once a year. That is, “i” has to be divided by the number of compounding periods per year, and “n” has to be multiplied by the number of compounding periods. Therefore, for a 10-year loan at 10%, where interest is compounded semi-annually (number of compounding periods = 2), i = 5% (i.e. 10% / 2) and n = 20 (i.e.10 x 2).
The following table demonstrates the difference that the number of compounding periods can make over time for a INR 10,000 loan taken for a 10-year period.
Shortcut Trick: Rule of 72
The Rule of 72 calculates the approximate time over which an investment will double at a given rate of return or interest “i”, and is given by (72 / i). It can only be used for annual compounding.
For example, an investment that has a 6% annual rate of return will double in 12 years.
An investment with an 9% rate of return will double in 8 years.
Attempt the following questions to check your level of preparedness for ratio proportion questions in competitive exams. You can answer the questions in comments section. Also make sure you checkout tomorrow’s Winner’s Curry Quantitative update for solutions to these questions along with the formulae used in VIDEO format by our Subject Expert.
Question 1 : Kamal lent out Rs. 60000. Out of these some part at 5% and remaining at 4% at simple interest. If total annual interest is Rs. 2560. What is the amount at 4% ?
A) Rs. 40000
B) Rs. 44000
C) Rs. 30000
D) Rs. 45000
Question 2: The difference between the compound interest and the simple interest on a certain sum at 12% p.a. for two years is Rs.90. What will be the value of the amount at the end of 3 years?
Question 3: Find the compound interest on Rs. 15,625 for 9 months at 16% per annum compounded quarterly.
A) Rs. 1851
B) Rs. 1941
C) Rs. 1951
Question 4: A sum of money at compound interest amounts to thrice itself in 3 years. In how many years will it be 9 times itself?
Question 5 : Find the compound interest on Rs.12450 for 9 months at 12% per annum compounded quarterly
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