INDEX 
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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 .