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    Notes - SI & CI

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    Janani Rangarajan
    Simple interest is calculated only on the original principal amount for the time period. Compound interest calculates interest on both the principal and accumulated interest over multiple time periods, resulting in a larger total amount repayed. The compound interest is calculated using the formula Amount = P(1 + Rate/Periods per year)Periods, where interest is compounded in each time period and added to the principal. A higher frequency of compounding periods results in a lower interest rate for each period but a higher overall effective annual interest rate.

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    Notes - SI & CI

    Uploaded by

    Janani Rangarajan
    56 views2 pages
    Simple interest is calculated only on the original principal amount for the time period. Compound interest calculates interest on both the principal and accumulated interest over multiple time periods, resulting in a larger total amount repayed. The compound interest is calculated using the formula Amount = P(1 + Rate/Periods per year)Periods, where interest is compounded in each time period and added to the principal. A higher frequency of compounding periods results in a lower interest rate for each period but a higher overall effective annual interest rate.

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    Simple interest is calculated only on the original principal amount for the time period. Compound interest calculates interest on both the principal and accumulated interest over multiple time periods, resulting in a larger total amount repayed. The compound interest is calculated using the formula Amount = P(1 + Rate/Periods per year)Periods, where interest is compounded in each time period and added to the principal. A higher frequency of compounding periods results in a lower interest rate for each period but a higher overall effective annual interest rate.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    56 views2 pages

    Notes - SI & CI

    Uploaded by

    Janani Rangarajan
    Simple interest is calculated only on the original principal amount for the time period. Compound interest calculates interest on both the principal and accumulated interest over multiple time periods, resulting in a larger total amount repayed. The compound interest is calculated using the formula Amount = P(1 + Rate/Periods per year)Periods, where interest is compounded in each time period and added to the principal. A higher frequency of compounding periods results in a lower interest rate for each period but a higher overall effective annual interest rate.

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    © All Rights Reserved
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    of 2

    Introduction

    Money borrowed today is repaid with a higher amount tomorrow. This gives rise to the
    concept of interest.
    A Creditor is a person who lends money to someone who wishes to borrow it, the latter
    termed as the Debtor.
    The amount of money which the creditor lends initially is known as the Principal (P) or
    Capital and the time frame for which he lends the money is known as Time or Period (T
    or n).
    The difference between the amount of money which the debtor borrows today (i.e. the
    principal) and the amount of money which he needs to repay at the end of the time period
    is called the Interest (I) over the Principal amount. Also, the total money which he repays
    at the end is termed as the Amount (A).
    In other words,
    Amount = Principal + Interest.
    The Interest is calculated based on the Rate of Interest (R), which is specified in terms of
    percent per annum (p. c. p. a) unless specified otherwise.
    There are two ways in which interests are calculated.
    1. Simple Interest (SI)
    2. Compound Interest (CI)

    Simple Interest
    The interest calculated for the given time duration only on the original principal, is called
    Simple interest.
    P× R× T
    Simple Interest (SI) = 100

    Compound Interest
    When money is lent at compound interest, at the end of a fixed period, the interest for that
    fixed period is added to the principal, and this amount is considered to be the principal
    for the next year or period. This is repeated until the amount for the last period has
    been calculated. The difference between the final amount and the original principal is the
    Compound Interest (CI). This amount can be calculated using the following formula:
    r n
    Amount = P(1 + 100 ) .
    r n
    Compound Interest (CI) = Amount - Principal = P(1 + 100 ) −P

    Compounding more than once a year


    The frequency of compounding can vary. It can be done half yearly (semi-annually),
    quarterly, monthly etc. When compounding is done more than once a year, the rate of
    interest for that time period will be less than the effective rate of interest for the entire
    year. For example, if the annual rate of interest is 10%, then the rate of interest when the
    amount is compounded half-yearly will be 5%. Thus, as the time period of compounding
    doubles, the corresponding rate of interest is halved.
    r/2 2n
    For half yearly rate, Amount = P(1 + 100 ) .
    r/4 4n
    For quarterly rate, Amount = P(1 + 100 ) .
    For monthly rate, Amount = P(1 + r/12
    100 )
    12n .

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