Unit 3 Compound Interest

Simple Interest: If the interest is calculated only of the principal whatever may be the time
in years, then the interest is called the Simple interest.

If P, T and R be principle, time in years and rate of interest in percentage per

annum then the Simple interest (S.I.) is given by
P×T×R
S. I. =
100

Amount: The sum of the principal and interest is called the Amount.

Hence, Amount (A) = P + S.I.

Compound Interest: If the interest is calculated not only of principal but

also of the Interest obtained in every year in the successive years then the
interest is called the Compound Interest. So in this case the interest is
calculated of amount of the previous year. In other words, the amount of
the 1st year is taken as the principal of the 2nd year, the amount of the 2nd
year is taken as the principal of the 3rd year and so on.

For Principal (P) Time (T) Interest Amount

st
1 year P 1 yr. 𝑷𝑹 𝑷𝑹 𝑹
𝑷+ = 𝑷 (𝟏 + )
𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎
2nd year 𝑹 1 yr. 𝑹 𝑹 𝑹 𝑹 𝑹
𝑷 (𝟏 + ) 𝑷 (𝟏 + ) 𝑷 (𝟏 + ) + 𝑷 (𝟏 + )
𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎
𝑹 𝑹
= 𝑷 (𝟏 + ) (𝟏 + )
𝟏𝟎𝟎 𝟏𝟎𝟎
𝑹 𝟐
= 𝑷 (𝟏 + )
𝟏𝟎𝟎

3rd year
4thyear

Hence the Compound Amount (C.A.) after T years is given by

𝑹 𝑻
𝐂. 𝐀. = 𝑷 (𝟏 + )
𝟏𝟎𝟎

And Compound Interest (𝐂. 𝐈. ) = 𝐂. 𝐀. −𝑷

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 𝑹 𝑻
= 𝑷 (𝟏 + ) −𝑷
𝟏𝟎𝟎

𝑹 𝑻
∴ 𝑪. 𝑰. = 𝑷 [(𝟏 + ) − 𝟏]
𝟏𝟎𝟎

Note:
1) If the compound interest is calculated half yearly then we have
𝑹
to replace T by 2T and R by 𝟐

𝑹 𝟐𝑻
Hence, C.A. half yearly 𝐂. 𝐀. = 𝑷 (𝟏 +
𝟐𝟎𝟎
)

𝑹 𝟐𝑻
And, C.I. half yearly 𝑪. 𝑰. = [𝑷 (𝟏 + ) − 𝟏]
𝟐𝟎𝟎

2) If the rate for every time period is different i.e., R1 for T1 years,
R2 for T2 years and so on then,
𝑹𝟏 𝑻𝟏 𝟐 𝑻𝟐
𝐂. 𝐀. = 𝑷 (𝟏 + ) (𝟏 + ) …..
𝟏𝟎𝟎 𝟏𝟎𝟎

3) If R1, R2 and R3 be rates for three successive years then,

𝑹𝟏 𝑹𝟐 𝑹𝟑
𝐂. 𝐀. = 𝑷 (𝟏 + ) . (𝟏 + ) . (𝟏 + ) … ..
𝟏𝟎𝟎 𝟏𝟎𝟎 𝟏𝟎𝟎

𝐄𝐱𝐞𝐫𝐜𝐢𝐬𝐞 𝟑

3(a) without using the formula of compound interest, calculate the

compound interest and compound amount of the following.
(ii) P = Rs. 86000 T = 3 years R = 5% compounded
annually.
Solution:

For the 1st year

Principal (P) = Rs 86000

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Time (T) = 1 year

Rate (R) = 5%
P × T × R 𝟖𝟔𝟎𝟎𝟎 × 1 × 5
S. I1 = = = Rs. 4300
100 100
Amount at the end of 1st year = 𝟖𝟔𝟎𝟎𝟎 + 4300 = Rs. 90300

For the 2nd year

Principal (P) = Rs. 90300

Time (T) = 1 year

Rate (R) = 5%
P × T × R 90300 × 1 × 5
S. I2 = = = Rs. 4515
100 100
Amount at the end of 2nd year (A) =90300 + 4515 = Rs. 94815

For the 3rd year

Principal (P) = Rs. 94815

Time (T) = 1 year

Rate (R) = 5%
P × T × R 94815 × 1 × 5
S. I3 = = = Rs. 4740.75
100 100
Amount at the end of 3rd year (A) =94815 + 4740.75 = Rs. 99555.75

Hence, compound Amount (C.A.) = 𝐑𝐬. 𝟗𝟗𝟓𝟓𝟓. 𝟕𝟓

And compound Interest (C.I.) = S. I1 + S. I2 + S. I3

= 4300 + 4515 + 4740.75

= Rs. 𝟏𝟑𝟓𝟓𝟓. 𝟕𝟓

b(ii) By using formula

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Principal (P) = Rs. 86000

Time (T) = 3 years

Rate (R) = 5%

Compound Amount (C.A.) = ?

Compound Interest (C.I.) = ?

Now by using formula,

𝑹 𝑻
𝐂. 𝐀. = 𝑷 (𝟏 + )
𝟏𝟎𝟎

𝟓 𝟑
= 86000 (𝟏 + )
𝟏𝟎𝟎

= 86000(𝟏. 𝟎𝟓)𝟑
= 𝐑𝐬. 𝟗𝟗𝟓𝟓𝟓. 𝟕𝟓
And 𝐂. 𝐈. = 𝐂. 𝐀. −𝐏

= 99555.75 − 86000
= 𝑹𝒔. 𝟏𝟑𝟓𝟓𝟓. 𝟕𝟓
5(a) What will be the difference in simple interest and compound interestof
Nisha if she deposits Rs. 45000 in a bank for 3 years with 11% p.a.
interest? Find it.

Solution:

Principal (P) = Rs. 45000

Time (T) = 3 years

Rate (R) = 11%

𝐶. 𝐼. −𝑆. 𝐼. = ?

𝑹 𝑻
Now, 𝑪. 𝑰. = 𝑷 [(𝟏 + ) − 𝟏]
𝟏𝟎𝟎

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 𝟏𝟏 𝟑
= 𝟒𝟓𝟎𝟎𝟎 [(𝟏 + ) − 𝟏]
𝟏𝟎𝟎

= 𝟒𝟓𝟎𝟎𝟎[(𝟏. 𝟏𝟏)𝟑 − 𝟏]
= 𝑹𝒔. 𝟏𝟔𝟓𝟒𝟑. 𝟒𝟎
𝟒𝟓𝟎𝟎𝟎×𝟑×𝟏𝟏
Again, 𝐒. 𝐈 = = Rs. 14850
𝟏𝟎𝟎

Hence,
𝑪. 𝑰. −𝑺. 𝑰. = 𝟏𝟔𝟓𝟒𝟑. 𝟒𝟎 − 𝟏𝟒𝟖𝟓𝟎 = 𝐑𝐬. 𝟏𝟔𝟗𝟑. 𝟒𝟎 Ans.

6(b) What will be the compound amount and compound interest of

Rs.50000 with rate of 8% p.a. after 2 years if the interest is
compounded half yearly? Find it.

Solution:

Principal (P) = Rs. 50000

Time (T) = 2 years

Rate (R) = 8%

C.A. half yearly = ?

C.I. half yearly = ?

𝑹 𝟐𝑻
Now, 𝑪. 𝑨. = 𝑷 (𝟏 + )
𝟐𝟎𝟎

𝟖 𝟐×2
= 𝟓𝟎𝟎𝟎𝟎 (𝟏 + )
𝟐𝟎𝟎

= 𝟓𝟎𝟎𝟎𝟎(𝟏. 𝟎𝟒)𝟒
= 𝑹𝒔. 𝟓𝟖𝟒𝟗𝟐. 𝟗𝟑
Again, 𝑪. 𝑰 = 𝑪. 𝑨. −𝑷 = 𝑹𝒔. (𝟓𝟖𝟒𝟗𝟐. 𝟗𝟑 − 𝟓𝟎𝟎𝟎𝟎) = 𝑹𝒔. 𝟖𝟒𝟗𝟐. 𝟗𝟑

Hence,

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 𝑪. 𝑨. = 𝑹𝒔. 𝟓𝟖𝟒𝟗𝟐. 𝟗𝟑
𝑪. 𝑰 = 𝑹𝒔. 𝟖𝟒𝟗𝟐. 𝟗𝟑 Ans.

7(e) The annual compound interest of a sum with 10% p.a. is less than Rs.40
than the half yearly compound interest of same amount with same
rate in one year. What will be the sum? Find it.

Solution:

Time (T) = 1 year

Rate (R) = 10%

𝑪. 𝑨. 𝒉𝒂𝒍𝒇 𝒚𝒆𝒂𝒓𝒍𝒚 − 𝑪. 𝑨. 𝒚𝒆𝒂𝒓𝒍𝒚 = 𝑹𝒔. 𝟒𝟎

Principal (P) = ?

Now, 𝑪. 𝑨. 𝒉𝒂𝒍𝒇 𝒚𝒆𝒂𝒓𝒍𝒚 − 𝑪. 𝑨. 𝒚𝒆𝒂𝒓𝒍𝒚 = 𝑹𝒔. 𝟒𝟎

𝑹 𝟐𝑻 𝑹 𝑻
Or, 𝑷 (𝟏 + ) − 𝑷 (𝟏 + ) = 𝟒𝟎
𝟐𝟎𝟎 𝟏𝟎𝟎

𝟏𝟎 𝟐×𝟏 𝟏𝟎 𝟏
Or, 𝑷 (𝟏 + ) − 𝑷 (𝟏 + ) = 𝟒𝟎
𝟐𝟎𝟎 𝟏𝟎𝟎

Or, 𝑷(𝟏. 𝟎𝟓)𝟐 − 𝑷(𝟏. 𝟏)𝟏 = 𝟒𝟎

Or, 𝑷(𝟏. 𝟏𝟎𝟐𝟓 − 𝟏. 𝟏) = 𝟒𝟎
Or, 𝟎. 𝟎𝟎𝟐𝟓𝑷 = 𝟒𝟎
𝟒𝟎
Or, 𝑷 = = 𝟏𝟔𝟎𝟎𝟎. Hence Sum = Rs. 16000 Ans.
𝟎.𝟎𝟎𝟐𝟓

8(b) The compound amount of a sum in 2 years is Rs.14520 and in 3 years is

Rs. 15972. Find the principal and the rate of interest.

Solution:
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 Let P and R be principal and rate of interest.

1st case:

Time (T) = 2 years.

C.A. = Rs. 14520.

𝑹 𝑻
Or, 𝑷 (𝟏 + ) = 𝐑𝐬. 𝟏𝟒𝟓𝟐𝟎.
𝟏𝟎𝟎

𝑹 𝟐
Or, 𝑷 (𝟏 + ) = 𝐑𝐬. 𝟏𝟒𝟓𝟐𝟎 … … … … . (𝐢)
𝟏𝟎𝟎

2nd case:

Time (T) = 3 years.

C.A. = Rs. 15972

𝑹 𝑻
Or, 𝑷 (𝟏 + ) = 𝐑𝐬. 𝟏𝟓𝟗𝟕𝟐.
𝟏𝟎𝟎

𝑹 𝟑
Or, 𝑷 (𝟏 + ) = 𝐑𝐬. 𝟏𝟓𝟗𝟕𝟐 … … … … . (𝐢𝐢)
𝟏𝟎𝟎

9(b) Divide Rs. 41000 into two parts such that their amounts at 50% p.a.
compound interest compounded annually in 2 years and 3 years are
equal.

Solution,

Let the two parts be Rs. x and Rs. 41000 – x.

1st part:

Principal (P) = Rs. x

Rate (R) = 50%

Time (T) = 2 years

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 𝑹 𝑻
C.A. for 2 yrs. = 𝑷 (𝟏 + 𝟏𝟎𝟎)

𝟓𝟎 𝟐
= 𝒙 (𝟏 + 𝟏𝟎𝟎)

= 𝟐. 𝟐𝟓 𝒙
For 2nd part,

Principal (P) = Rs. (41000 – X)

Rate (R) = 50%

Time (T) = 3 years

𝑹 𝑻
C.A. for 3 yrs. = 𝑷 (𝟏 + 𝟏𝟎𝟎)

𝟓𝟎 𝟑
= (𝟒𝟏𝟎𝟎𝟎 − 𝒙) (𝟏 + )
𝟏𝟎𝟎

= (𝟒𝟏𝟎𝟎𝟎 − 𝒙) (𝟑. 𝟑𝟕𝟓)

= 𝟏𝟑𝟖𝟑𝟕𝟓 − 𝟑. 𝟑𝟕𝟓 𝒙

Now, by question,
C.A. for 2 yrs. = C.A. for 3 yrs.

Or, 𝟐. 𝟐𝟓 𝒙 = 𝟏𝟑𝟖𝟑𝟕𝟓 − 𝟑. 𝟑𝟕𝟓 𝒙

Or, 𝟐. 𝟐𝟓 𝒙 + 𝟑. 𝟑𝟕𝟓 𝒙 = 𝟏𝟑𝟖𝟑𝟕𝟓

Or, 𝟓. 𝟔𝟐𝟓 𝒙 = 𝟏𝟑𝟖𝟑𝟕𝟓

𝟏𝟑𝟖𝟑𝟕𝟓
Or, 𝒙 =
𝟓.𝟔𝟐𝟓

Or, 𝒙 = 𝟐𝟒𝟔𝟎𝟎

And, 𝟒𝟏𝟎𝟎𝟎 − 𝒙 = 𝟒𝟏𝟎𝟎𝟎 − 𝟐𝟒𝟔𝟎𝟎

= 𝟏𝟔𝟒𝟎𝟎.

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Hence the two parts are 𝑹𝒔. 𝟐𝟒𝟔𝟎𝟎 𝒂𝒏𝒅 𝑹𝒔. 𝟏𝟔𝟒𝟎𝟎. Ans.

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