COMPOUNDSIMINPLETERE AN

INTRODUCTION
In Class VIl, you have already
learnt about simple
Interest arnd shall also learn about
interest
interest. In this
compound interest, difference chapter, we shall
between simple andreview simple
SIMPLE INTEREST COmpound
Principal. The money borrowed (lent or invested) is
Interest. The additional money paid by the called principal.
used is called interest. borrower to the moneylender in lieu of the m
Amount. The total money paid by the
borower to the moneylender is called
Rate. It is the interest paid on amount = principal + interest, amount. Thus
For example: 100 for specified period.
() Rate of 6% per
4 annum means that the interest paid
on 100 for one year is
(ii) Rate of 2.5% per
?2.5 quarterly means that the interest paid on 100
for 3 months is
However, if the time period for the interest rate is
period as one year. not given, then we shall take
the time
Time. is the time for which the money is
It
Simple interest. It is the interest borrowed (or invested).
interest for any given time. calculated on the original money (principal) at given
ate of
Simple interest is given by the formula :

Simple interest Principakx Ratex Time

100
In solving problems on
If P denotes the simple interest, remember the
principal, R the rate of interest, T the following:
borrowed (or invested), I (or S.L) the simple interest and Athetime for which the money is
PxRxT
Ix100
amount, then
100
P= RxT R= Ix 100 T = Ix 100
PxT' PxR
 Simple and Compound nterest 135
PxRxT
1PeleP.
100
15000 is
|Sum
borrowed
at a 15% per
thissumandtheamount to be paidrate
of
at the end of 3 years.for annum 3 years, Find the simple
P(principal)= 15000, R(rate of interest) =15% p.a.
years
=3
(time) PxRXT
T interest)= 15000 x15x3
(Simple 100 100
sL
=6750
Amount Principal +Interest
-15000 + * 6750= 21750
Hence,thesimpleinterest is 6750 and the amount to be paid is 21750.
money will fetch 661.50as simple interest in one year 9
fample
2 What sum of months at
annum?
% per
6; thesum of money (principal) be P.
solution.Let.
1323 2 20
661.50 2
rate =6% p.a. = %p.a.,
Interest=
9 3 7
-1 vear 9 monthns = years = 1,4 years = 4 years.
Ix100
Using P= RxT we get

1323 x100
2 1323 x 100 x 3 4 1323 x 5x6
P=
X = 5670
207 2 20 7 7
34 =5670
Hence, the required sum of money

Elample3. Hoolong willit take for 5660invested at 10% per annum simple interest toamount
to7641?
) 10% p.a.
A=7641,,R=
Solution. Here,P= 5660,
I=A -P=77641 -5660 = R1981
time.
Let Tyears be the required 1
1981 x 100 1981 7
Ix100 get T = 5660 x 10
Using T= PxR T we 566

6 months.
Hence, the required time = 3, years = 3 years
1
moneyat 6,% per annum
JExample 4. In what time will the simple interest on a certain sum of
3
beofiself?
Solution. Let the sum of money (principal) be P, then
3
interest =
8
Rate of simple interest = 6;% p.a.= 425,
% p.a.
 Mathematics-VIll
Understanding
L6 ICSE
required time.
Let Tyearsbe the
3 4

WegetT 8 25
I l00
8 x100 5 6.
Using, T PxR Px 4
years.
Hence, the required time =6
5. At what rate percent simple interest willasum of mOney will amount to
Janple
6years&months?
then
Solution. Let the principal be P,
5
amount =
3
amount-principal
I(Interest) =
2 20
6 years 8 months =6,5
years =6, years = 3 Years,
Time =
annum of simple interest.
Let Rbe the rate percent per
200 X 3 = 10.
Ix100 3
Using R= PxT Weget R= 20 3 20
Px
3
Hence, the required rate of interest = 10% per annum.
2 years at 7% per annum
Mxample 6. What sum of money will amount to 4230 in
interest?
Solution. Let the sum of money (principal) be P.
1 5
A(amount) =74230, T(time) =2, years = years,

R (rate) = 7% per annum

Using the formula A = 1+ RxT P, we get
100

7x2 4230 x 40
4230 = 1+
100 P=(1P- 47
= 3600.

Hence, the required sum of money =3600.

Exercise 8.1
1. Find the simple interest on 4000 at 7.5% p.a. for 3 years 3 months. Also find the
amount.
2. What sum of money will yield 170.10 as simple interest in 2years 3months at 6's
per annum?
3. Find the rate of interest when 7800 fetches 130 as simple interest in 2 years
6 months.

4. Find the time when simple interest on 3.3 lakhs at 6.5% per annum is 75075.
 Simple and Compound Interest 137
fmoney when
Sumof

at, bpa lor2 years is 2356,25

interest
aWInpleamountts KI1300 at 4% p.a. for 3 3
final
years months.
) it take acertain sum of money to triple itself at 13; %per
wnple
inteest?
LAlaertainrate of simpleinterest R4050 amounts to R4576.50 in 2 years. At the same
annum
ateofstpleinterest, how much would 1 lakh amount to in 3years?
AWhatsum,of moneyinvested at 7.5% p.a. simple interest for 2 years produces twice
asmuchinterestas 9600 in 3years 6 months at 10% p.a. simple interest?
|Hint.Letthe moneyinvested be P. According to given information,
9600 ×10x2
Px75x2- twice of
100
100

OMPOUNDINTEREST
Normallytheinterest paid or charged is never simple. In simple interest, the principal
remainsConstant for the whole loan period. However, in practice, the method according
towhichhbanks, post offices, insurance companies and other financial institutions calculate
is
interest
different from the one given above.
Theseinstitutions calculate the interest for one year. Then the yearly interest is added
totheprincipaland the amount so obtained is treated as the principal for calculating the
interestforthe second year and so on. This process is repeated until the amount for the
loan period is found.
whole
Thediference.between the final amOunt and the original principal (money borrowed) is called the
compoundinterest.
Compound interest in short is written as C.I.
REMARK
In case of simple interest, the principal remains constant for the whole loan period but in
case of compound interest, the principal goes on changing every year.

Example 1. Calculate the compound interest on 12500 for 2years at 6% per annum.
Solution. Rate of interest =6% per annum, principal for the first year =12500.
12500 x6x1 =750
Interest for the first year =?
100
Amount at the end of first year =12500 +750 =713250
Principal for the second year =13250
13250 x 6x1
Interest for the second year = =795
100
Amount at the end of second year =13250 +795 =14045
Compound interest for 2 years =final amount - (original) principal
=14045 -12500 =1545.
 Mathematics - VII
ICSE Understanding
138

NOTE
The compound interest may also be obtainedby adding together the interest of

years.

Thus, above example,

in theinterest
compound for 2 years =interest of 1st year +interest of 2nd year
=750 +795 =1545.

for 3 years at 10% per annum compound

Example 2. Kapil invests 12000 interest in Ban
Baroda. Calculate :
()the compound interest for the second year. (ii) the compound interest for the third y
annum
Solution. Rate of interest = 10% per
year =12000
() Principal for the first 12000 x10 x1 =1200
Interest for the first year = 100
=12000 +1200 =13200
Amount at the end of first year
Principal for the second year=13200
13200 x10 x1.=1320
Interest for the second year =? 100
second year =1320.
. Compound interest for the
year =13200 +?1320 =14520
() Amount at the end of second
Principal for the third year =14520
14520 x10 x1 =71452
Interest for the third year = 100
=1452.
:. Compound interest for the third year
20000 for three years at 8% pr
Example 3. Calculate the amount and the compound interest on
annum.

Solution. Rate of interest = 8% per annum

Principal for the first year =20000
Interest for the first year =
20000 x8X11600
100
+1600=721600
Amount at the end of first year =20000
Principal for the second year = 721600
21600 x8x1 =71728
Interest for the second year =?
100
=723328
Amount at the end of second year =21600 +1728
Principal for the third year =23328
23328 x8x1 =71866.24
Interest for the third year =? 100
Amount at the end of third year =23328 +1866.24 = 25194.24
principal
.: Compound interest for 3years = final amount - (original)
=(25194.24 - 20000 =5194.24

Hence, amount = 25194.24 and compound interest =5194.24

 Simple and Compound Interest 139
4Clkulatetheanmount diue and the compound interest on 10000 in 2 years
years is 8% and 9% when the
ntrst suCCessive
on

r
Principalforthefirst year 10000, rate 8% pa. respectively
10000 x8x 1I
or,
pest
thefirst year 100 A00
at
the, end of first year 10000 + 80010800
Amount
for
hcpal
thesecond year 10800, rate 9% p.a.
10800 x 9xl
orthesecond
year = -972
haenst 100

ati
Amount the end of second year =10800 + 97211772
t due after 2
Amount
years=11772
Compoundinterest for 2 years =final amount -(original) principal
=11772-10000 =1772
seethe
difference between simple interest and compound interest with the
Letus
help
ofanexample.
Eample5. Calculate the simple interest and compound interest on 25000 for 2 years at 10% per
annum. Aso fndthe difference between compound interest and simple interest.
Solution.
Simple Interest Compound Interest
25000
Pincipal for the first year = Principal for the first year =25000
10% p.a. Rate of interest = 10% p.a.
Rate of interest =

Interest for first year =

25000 x10x1 -72500
100
Interest for first year = 25000100x10x1 -2500

Amount at the end of first year Amount at the end of first year
=(25000 + 2500) -(25000 + 2500)
=(27500 =27500

Principal for second year = 25000 Principal for second year = 27500
25000 x10x1 =72500 27500 x10× 1 -72750
Interest for second year = Interest for second year = 100
100

Amount at the end of second year Amount at the end of second year
-(27500 + 2500) =(27500 + 2750)
=730000 -730250

Interest earned by simple interest in 2 years :. Interest earned by compound interest in 2years
=(30000 - 25000) =(30250 - 25000)
-5000 =5250

. Simple interest =5000 and compound interest =5250

Difference between simple interest and compound interest =5250 -5000 ={250.
l40 ICS Understanding Mathematics-Vll

Exercise 8.2
1. Calculatethe
compound interest on R6000 at 10% per annum
2. Salma borrowed from
Mahila for two
e a years
Af the rate of interest is 4% per Samiti asum of R1875 to
purchase
pay after 2years? annum, what is the compound
interestsewthating% he aTine
acob invests 12000 for 3 years at 10% per
annum. Caleulate the
has
compound interest that Jacob
4. Aman invests R46875 at 4% will get after 3years. amount and he
per annum compound interest lor 3
(0) the interest for the first
year. years. Caleulat.
() the amount standing to his credit at
(in) the interest for the the end of second year.
5. Calculate the third year.
10% pa. Also compound interest for the
find the sum due at the endsecond year on 6000 invested for 3years
6. Calculate the of third year.
of interest for amount and the compound interest on 5000 in 2 years whern the rate
w7. Calculate the successive years is 6% and 8% respectively.
difference between the compound interest and the
{20000 in 2 years at 8% per
annum. simple interest on
DEDUCING A
FORMULA FOR COMPOUND
Inthe previous section of this INTEREST
method used to calculate C.I. chapter, you have learnt to calculate
is very lengthy. Let us try to compound interest. The
compound interest. finda
annum for n years. Suppose a sum of P is compounded annuallyshorter way of finding
at a rate of R% per
Principal for first year =P
Interest for first year = PxRx1 PR
100 100

Amount at the end of first year = P+ R

100
Principal for second year =P|1+
100

XRx1
Interest for second year = PK14 R
100
100 100
Amount at the end of second year = P 1+ R PR R
1+
100 100 100

Proceeding in the same way, the amount at the end of n years

A=P1+100R and C.I. = A-P
 Simple and Compound Interest 141
lencetheformula for finding amount at the end of nyears for principal Pand rate of
annumis
tR'%per
ndrest
RY
100

CompoundInterest (C.I) = A-P

and

Eample1.,Findthe compound interest on 12500 for 3years at 10% per annum compounded
annually.
Solution. Given P= 12500, R= 10% p.a., n=3 years
10)3
A=t125001+100
110)3
=12500 x
100 -* 12500 ×
=12500 x 11 11 11
10 10 10
=16637.50
CL=A-P= 16637.50 - 12500 4137.50
4137.50
Hence, compound interest is
compounded annually, half-yearly or quarterly
Rate
In the previouss part of this chapter we have used the term "Compounded annually". What
does it mean? Why have we used it? To answer these questions, let us define the term
conversion period.
Coupersion period. The time period after which the interest is added each time to form a new
principal is called conversion period.
Or

The time from one specified interest period to the next period is called conversion period.
If this specified period is one year (i.e. the interest is compounded annually), then there
is one conversion period in a year; if this period is six months (.e. the interest is compounded
semi-annually or half-yearly) then there are two conversion periods in a year and half yearly
rate will be half of annual rate; if this period is three months (i.e. the interest is compounded
quarterly) then there are four conversion periods in a year and quarterly rate will be one
fourth of the annual rate.

NOTE
Obviously, if the rate of interest per annum is 10% and if the interest is compounded
1 the
semi-annually, then the rate of interest per conversion period is 2 of 10% i.e. 5%. If
Interest is compounded quarterly, then the rate of interest per conversion period is
of
10% i.e. 2.5%.

1
Example 2. What amount is to be repaid on a loan of R10000 for 1; years at 10% per annum
compounded half yearly?
Solution. Since rate of interest is 10% per annum,
rate of interest per conversion period (half yearly) =5%
142 ICSE
Understanding Mathematics - VIII
As the loan is to be paid in 1 1
n(the number of
years, therefore
conversion periods) = 3

100
21)3
=10000 x =?10000y 21,21 21
20
Hence,? 11576.25 to be repaid after 1 1
20 20 20
years.
=11576.25
Example 3. Find the amount to be paid at the end of 6
compounded quarterly. months on 1800 at
Solution. Since rate of interest is 8% per
annum,
rate of interest (quarterly) = 8 %=2%.
4
As the amount to be paid in 6
months, therefore n=2 (quarters)
A=P1+R =*1800 1+ 2 2 (51 )
100 -1800 x
100 50

=1800 x 51 51 46818
50 50 25
=71872.72
Hence,1872.72 to be paid at the end of 6 months.
Compound interest when interest rates for
different successive conversion periods ar
When the rates of interest for the
then anount Ais given by successive conversion periods are
R%, Rylo, R%,.
A= P1+R1
100
R2
100
1+ R
100
and CL = A-P
Example 4. How much. will 25000 amount in 2 years, at
Successive years are 4% and 5% per year? comp0und interest, if the rates for te
Solution. P= 25000, R, =4%, R, =5%
A =P|1+KL1+ K2
100 100 =R25000 1+1+5
100 100
=725000 x 2621 =727300.
25 20
Compound interest when the total time is not a complete number of
conversion periods
When the
total time is not a complete number of conversion periods then to
amount we consider simple intérest for the last partial calculate u
period.
For example, if time is given 2 vears 5 months and the interest is R% per
aru
compounded annually, then amount Ais given by,
 Simple andCompound Interest 143
5
xR
l00

d CIA-p

Computethe amount and the compound interest on 10000 compounded annually for
4%perannum.

we
findthe amount after 2 years
First,
Sultution
R Y"
26 26
= 10000x =10000 x X =710816
25 25
year=10816
Principalforthe third
10816x 4x
next year = 2 -216.32
Interestforthe 2 100

2 years =10816 + *216.32

11032.32
Amount after
1
Compoundinterest for 2 years= A-P
=11032.32 -T10000=1032.32.
usingformula)
Alternativemethod (by 6
X4
4 1+12
1+-
Amount at the end of 2 years =*10000 100 100

-*10000x2625 26
25 50
51 =711032.32

Compound interest for 2 years =11032.32 -10000

. 2
=71032.32
compound
noney will amount to 3630in two years at 10% per annum
Example 6. What Sum of
interest?
annum, n= 2 years
Solution. A=3630, R= 10% per
10 2

A=P1n 73630 =P1+ 100

73630 = Px
11-X 11
10 10

P=3630x 10 10 =73000
1111
compound interest will 5000 amount to 5832 in
bxample 7. At what rate percent per annum
2years?
Solution. A=75832,P= 75000, n = 2 years R )2

’ 5832 = 75000 1+ 100

RY
A= P1
 Understanding Mathen
144 ISE
5832 729

100
S000
R 27
2
1+ 100 25 100 25

R= x 100 = &
25

rate = 8% per annum.

the
Hence, &. In howe manyyurs will 4000 amount to 5324 at 10°% compom
Example
annum
5324, P = 4000, R = 10% per
Solution. A = 10
R 15324 =40001+
100
= P11+.100
A
1331
5324 1000
4000
years.
. Required time = 3
borrous 12500 at 12% per annum for 3 yers at simgne
Example 9. Ashima
for the samte timte pericd
borrous the same amount by hou much?
and
at lO%er
interest mi
Who pays more interest
Ashima
Solution. Simple interest paid by annum, T=3years
P=12500, R = 12% per
PxRxT 12500 x12 x3 =4500.
SI. = 100
100

Compound interest paid by Radha

P=12500, R = 10% per annum, n=3 years
10
A=P1+R A=12500 1 +100
100
3
A=12500x10x =l6637 5)
A =12500 x 10 10
=4137.50
CI. =A-P=16637.50-12500
4500 > 4137.50
4137.50) ie 25)
Ashima paid more interest and she paid(4500
Radha.

Exercise 8.3
1. Calculate the amount and compound interest on
()?15000 for 2 years at 10% per annum compounded annually
() 156250 for 1 years at 8% per annum compounded half yearly.
(in) Z100000 for 9months at 4% per annum compounded quarterly. 4N0Â
2. Find the difference between the simple interest and compound interest on
2 years at 5% per annum, compound interest being eckoned annualy
 Simple and Compnd Interest 145
theompound nterest on 125 for years if the rates of interest for the first,
thind year are respetively 4%, S% and 6 per annum
Aanlaborrowed2600from aBank to buy ascooter at arate of1%pa conpounded
What amount will she pay at the end of 2 years and 4 nonths to dear the

<Anlbornowed LA000 from Rakesh at 8'% per annum simple interest for 2years. If
Anilhadborrowedthis sum at 8% per annum compound interest, what extra amount
pay?
hehasto
wpuld borrowed.75000 from a bank. Ifthe rate of
Mukesh interest is 12% per annum, find
A amounthe would be paying after 1 years if the interest is
the
) compoundedannually (i) compounded hall-yearly.
Aryman
invvested 10000 in a company. He would be paid interest at 7% per annum
compounded
1. annually. Find
amount received by him at the end of 2years.
()the
theinterest for
the 3rd year.
()
money will amount to 9261 in 3years at 5% per annum compound
Whatsum of
8interest?
h.t sunm invested for 1 years compounded half-yearly at the rate 8% pa. will
amount to 1406082
what rate percent will 2000 amount to 2315.25 in 3 years at compound
10. At
interest?

IL. IR40000
amounts to 46305 in 12 years, compound interest payable half yearly, find
annum.
the rate of interest per
whattime will 15625 amount to
17576 at 4% per annum compound interest?
12. In semi-annually amounts to 18522. Find the
13.F16000 invested at 10% p.a. compounded
investment.
time period of the

/0bjective Type Questions

MENTAL MATHS
1. Fill in the blanks:
invested) is called ....
) The money borrowed (lent or
additional money paid by the borrower to the moneylender in lieu of the
(i) The
money used is called ......
whole loan period.
(m) In simple interest, the principal ...for the
changing every conversion period.
() In compound interest the .... goes on
time to form a new principal is
(o) The time after which the interest is added each
called ......
semi-annually rate is .... of
(i) If the interest is compounded semi-annually then
annual rate.
 2 (,
7find 5. 4.
6. What
compounded Find payable
yearly. Find payable
interest Eind
yearly.
iterest Eind
for 132651?
amount
atind to it Progress Check
Your
the 8% was the the the the
th
the per compoundede sum
uccessive payable
difference amount amount
amount time amount
annum, invested
(in half
and
half and and
years.
compounded and years) yearly. between
annually?
for compound
yearly the the
compound
in 21 Would compound compound
which years
C.I
thisinterest and
annually.
interest ?12500
compounded
interest S.I
interest interest
on
on2500 will on sum
be
10000 on on
produce more of
hal f 5000 7400 ?5000
in
2 yearly than for
years3246.40 1 for for for
2
the years 1 years 2
if at years year
2
the th e interest
as at at at
rates
compound rate at
10% 8% 5% 6%
of he
are would per per per per
4o
5% annum, annum anr annum,
and670 interest p.a. get
wil if