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INDEX

Basic concepts Simple interest Compound interest Nominal and effective rate of interest Present value Future value

BASIC CONCEPTS Principal (P) :Time (t) :Interest (I) :Amount (A) :Rate of interest (r) :- .

Calculate on outstanding principal balance. formula :I = P*R*N Where. I = Interest in rupees P = Principal in rupees R = Rate of interest N = Number of years .SIMPLE INTEREST Interest computed on the principal for the entire period of borrowing.

p = principal amount I = interest . Amount = P+ I Where.Here.

06 * 5 I = Rs.1 Find simple interest on Rs.2500 at 6% p.750 A=P+I = 2500 + 750 A = Rs.a for 5 years? Solution ± Given: P = Rs.ILLUSTRATION .2500 R = 6% = 6/100 = 0. I = P*N*R = 2500 * 0.06 N = 5 years Therefore.3250 .

2 An investor has option of investing in two investment schemes. scheme A and scheme B.Scheme B gives 2% more simple interest than scheme A. Find interest rates offered in schemes A and B.ILLUSTRATION .600 more than that earned in scheme A. For a 3 year period interest earned on a sum in scheme B would be Rs. .

interest on scheme B = (r + 2)% Let Principal (P) = µx¶ t = 3 years Therefore interest earned in scheme A = xr3/100 = 3*r/100 Interest earned in scheme B = x(r+2)3/100 = 3*r + 6x/100 Difference between two interests : interest in scheme A ± interest in scheme B = 600 . interest on A = r% Therefore.SOLUTION :Let.

3*r + 6x/100 ± 3*r/100 = 600 Therefore 3*r + 6x ± 3*r/100 = 600 Therefore 6x = 600000 Therefore x = 10000 Therefore P = principal = Rs. 10000 .

Principal amount increases for the next time. Interest which is reinvested along with the principal amount. Most investments operate on principle of compound interest.COMPOUND INTEREST Interest earned on the principal amount. .

for a period of two years.a. .ILLUSTRATION . At the end of 1st year: I=P*r*n = 1000 * 5/100 * 1 = Rs 50.1 Suppose Rs. 1000 are invested at compound interest of 5% p. Find the amount of interest.

Now interest earned in the 2nd year =P*r*n = 1050 * 5/100 * 1 = Rs 52.For the 2nd year : The interest earned in the 1st year will be added to the principal.50 . New P = P + I = 1000 + 50 New P = Rs 1050.

. Conversion period = in the above Illustration.5 Therefore A = 1102. Various terms : Compounded sum = Rs 1102.5 Rs. Compound interest = A ± P = 1102. 1.5 ± 1000 = 102.5rs 3.Therefore at the end of the 2nd year: Amount = A = 1050 + 52.5 2. the conversion period is 1 year.

I = Pr Therefore. Where t = 1 Therefore. A= P+ I A = P + Pr Therefore A = P(1 + r) . I = P*r*t.FORMULAE OF COMPOUND INTEREST At the end of 1st year.

For the 2nd year Principal = P(1 + r) Interest = (P(1 + r))r. t=1 At the end of 2nd year. at the end of 3rd year. Amount = principal + interest = (P(1 + r)) + (P(1 + r)) = P(1 + r)^2 Similarly.t = (P(1 + r))r. Amount = P(1 + r)^3 .

A = P(1 + r)^n For multiple conversion periods in a single year A = P(1 + r/m)^m.At the end of n years.n. where m = number of conversion periods .

4000 for one and a half years at 10% p.e 3 years r = 10% p.e 5% (compounded half yearly) Now A = P(1 + r)^n = 4000(1 + 5%)^3 .Illustrations 2 : Compute the compound interest on Rs.a i. Solution: here P = 4000 n = 1 1/2 years i.a compounded half yearly.

50 The compound interest is therefore Rs.630.50 ± 4000 = Rs.50 .Therefore A = 4000(1+0.4630.05)^3 A = 4630.

e.g r = 10%.Nominal and effective rate of interest Nominal rate of interest : The normal rate of interest that is calculated on the principal amount annually. .10 Hence nominal rate of interest is the normal interest taken on the principal amount once in a year. P = 100rs then interest should be Rs.

Effective rate of interest : Effective rate of interest is the interest rate that is compounded more than once a year.a since interest is being compounded more then once a year. Eg : if u invest rs.100000 for a year at the rate of 6%p. The effective rate of interest exceeds the per annum interest rate. .a compounded semi-annually Effective rate of interest for a year will be more then 6%p.

3090 Therefore total interest earned = 3000 + 3090 = Rs.Interest for 1st 6 months = 100000 *6%*6/12 = Rs.3000 So principal for next 6 months = 100000 + 3000 = Rs.103000 Interest for next 6 months = 103000*6%*6/12 = Rs.6090 .

Present value is a reciprocal of future value. Therefore rs1000 is your present value of tomorrows rs 1070 at 7% .g.you have invested rs1000 at 7%.you get rs1070 at the end of the year. For e.:.Present value Today's value of tomorrows money discounted at the interest rate.

We can also compute effective rate of interest by following formula I = PEn 6090=100000 x E x 1 Therefore.09% Thus. E = 6090/100000 i. effective interest rate will be more then actual interest rate if compounded more then once a year Actual interest rate = effective interest rate if compounded annually. r = rate of interest n = number of conversion period. E = 0. .0609 or 6. Effective interest rate = (1 + r)^n ± 1 Where.e.

Future value Future value is a cash value of an investment at some time in the future.:-you have invested rs1000 at 10% . For e. It is tomorrows value of today's money compounded at a certain rate of interest.g.

Presented by : Vicky Bhansali .02 Sameer Jain ± 09 Sumit Jain ± 11 Aagam Shah ± 37 Jay Shah ± 41 Shahil Shah ± 49 Shashank Shah .51 .50 Nikhil Shand .

Thank You .

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