Simple Interest and compound interest

Interest is the extra money paid by the banks on our money at a fixed rate of interest.

\mathrm{Simple\ Interest=\dfrac{P\times R\times T}{100}}

Where P = Principal amount

R = Rate of interest

T = Time period for which the interest is paid

The interest calculated both on the principal and the interest earned is called compounded interest

Example

A sum of Rs. 20,000 is invested by Honey for 2 years at an interest of 8% compounded annually. Find the Compound Interest (C.I.) and the amount she has to pay at the end of 2 years. 

Solution:

Step 1 Firstly calculate the Simple Interest (S.I.) for one year.

 Let the principal for the first year be P1. Here, P1 = Rs. 20, 000

SI1 = SI at 8% p.a. for 1st year = \dfrac{(20000 \times 8)}{100} = 1600\ \mathrm{Rs} .

Step 2: now find the principal for the next year

Amount at the end of 1st year = P1 + SI1 = Rs. 20000 + Rs. 1600 = Rs. 21600 = P2 (Principal for 2nd year)

Step 3: Now the new principal for another year = 21600 Rs.

SI2 = SI at 8% p.a. for 2nd year

 =\dfrac{21600\times8}{100}=1728\ \mathrm{Rs}

Amount at the end of 2nd year = P2 + SI2 = Rs. 21600 + Rs.1728 = Rs. 23328

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