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Calculating Compound Interest

A sum of Rs. 24000 is borrowed by Hari for 2 years at the rate of 5% compounded annually.
 

Step 1: Find the Simple Interest (S.I) for one year
Let the principal for the first period be

at 5% for the 1st year =

Step 2: Then find the amount which will be paid or received. This becomes principal for the next year.
Amount at the end of 1st year
                                          = Rs. 25200 = P2

Step 3:Again find the interest on this sum for another one year

                                  = Rs. 1260

Step 4: Find the amount which has to be paid or received at the end of second year

 

Amount at the end of 2nd year = P2 + SI2
                                                  
= Rs. 25200 + Rs. 1260
                                          = Rs. 26,460
              Total interest given = Rs. 1200 + Rs. 1260 = Rs. 2460

We can calculate SI in this way also.

When compound interest was used Hari would pay Rs. 60 more

Difference between Simple Interest and compound Interest.
 

    Under
Simple Interest
Under
Compound Interest
First year

 



Second year

 

 

Third year

Principal
Interest at 10%

Year end amount


Principal
Interest at 10%

Year end amount


Principal
Interest at 10%

Year end amount

Rs. 100.00
Rs. 10.00
------------
Rs. 110.00
------------

Rs. 100.00
Rs. 10.00
-------------
Rs(110 + 10) = Rs. 120
__________

Rs. 100.00
Rs. 10.00
------------
Rs(120 + 10) = Rs. 130

Rs. 100.00
Rs. 10.00
------------
Rs. 110.00
------------

Rs. 110.00
Rs. 11.00
------------
Rs. 121.00
-------------

Rs. 121.00
Rs. 12.10
------------
Rs. 133.00


Interest earned by S. I. = Rs(130 - 100) = Rs. 30
Interest earned by C.I. = Rs (133.10 - 100) = Rs. 33.10

In simple Interest, the Principal remains the same
In compound Interest, the Principal charges after year.





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