UNIT – 2

CH – 2 Compound Interest [Without using formula]

Definitions:

Principal: The money borrowed is called the principal.

Interest: The extra money paid for using lenders money is called interest.

Amount: The total money paid to the lender at the end of the specified period is called the amount.

Amount = principal + interest

i.e. A = P + I

Interest (Simple interest): Interest is said to be simple, if it is calculated on the original principal
throughout the loan period, irrespective of the length of period for which it is borrowed.
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 ×𝑅𝑎𝑡𝑒 ×𝑇𝑖𝑚𝑒
S.I = 100

𝑃×𝑅×𝑇
i.e. I = 100

Compound interest: At the end of the first year, if the interest accrued is not paid to the money
lender but is added to the principal then this amount becomes the principal for the next year, and
so on. This process is repeated until the amount for the whole time is found.

Compound interest = Final amount – Original principal

Note:

1. When the interest is compounded yearly, the principal changes (increases) every year.

2. When the interest is compounded half yearly the principal increases every six months.

3. The period (time) after which the principal changes is called the conversion period.

[Refer examples 1, 2 and 3 in text book]

EXERCISE 2(A)

Q.NO 1: Rs.16, 000 is invested at 5% compound interest compounded per annum.

Use the table, given below, to find the amount in 4 years.

Year ↓ Initial Interest Final

amount (Rs.) (Rs.) amount
(Rs.)
1 st 16,000 800 16,800
2 nd
3 rd
4 th
5 th

[HOMEWORK]

Q. no 2(i)

[HOMEWORK]
Q. no 2 (ii)

Solution:
𝑃×𝑅×𝑇
[Formulas used: = 100 , A = P + I and C.I = Final amount – original principal]
 Ans.
Q. no 3
Calculate the amount and the compound interest on:
(i) Rs. 4,600 in 2 years when the rates of interest of successive years are 10%and 12% respectively.
(ii) Rs. 16,000 in 3 years, when the rates of the interest for successive years are 10%, 14% and 15%
respectively. [HOMEWORK]

Solution 3 (i)
For 1st year
P = Rs. 4600
R = 10%
T = 1 year.
𝑃×𝑅×𝑇
I= 100

A = 4600 + 460 = Rs. 5060

For 2nd year
P = Rs. 5060
R = 12%
T = 1 year.

𝑃×𝑅×𝑇
I= 100
A=P+I
= 5060 + 607.20 = Rs. 5667.20
Compound interest = Final amount – original principal
= 5667.20 - 4600
= Rs. 1067.20
Amount after 2 years = Rs. 5667.20 Ans (i)
Q. no 4:
1
Find the compound interest, correct to the nearest rupee, on Rs.2, 400 for 22years at 5 per cent per
annum. [HOMEWORK]