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Calculating Simple interest and compound interest

Calculating Simple interest and compound interest. Module Objectives. An introduction to the concept of interest on money. Calculating interest- Different types of interest: simple and compound Exercise your newfound knowledge !. Interest. Raju needs money

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Calculating Simple interest and compound interest

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  1. CalculatingSimple interest and compound interest

  2. Module Objectives • An introduction to the concept of interest on money. • Calculating interest- Different types of interest: simple and compound • Exerciseyournewfoundknowledge!

  3. Interest • Raju needs money • Bank and Raju write down : How much ?=Rs.100 Time beingborrwed for ?=2 year • Bank calculates the amount Raju has to return after 2 years • For this service thatbank gave to raju, it charges a fee. This feeisnothing but interest

  4. Types of interest • Simple • compound

  5. Simple Interest After 2 years After 1 year 0 years

  6. Simple Interest Recap the previous example. Raju borrowed: -Rs 100 -For 2 years -At a rate of 10% Thus, at the end of 2 years, for borrowing Rs 100, Raju willowe the bank Rs. 120 10 After 1 year 100 10 10 After 2 years 100 10+10=20

  7. The math of it Principle = Rs. 100 Time = 2 years Rate of interest = 10 % per year Total interest = (interest for year 1) + (interest for year 2) = (100x0.1) + (100x0.1) =10 + 10 = Rs. 20 An easier way to do this -> use formula Simple interest (SI)= (PTR)/100 Ex. SI = (100x2x10)/100

  8. Let’s change the numbers a bit Amount borrowed: 100 Time: 3 years Interest rate: 15% Thus, at the end of 3 years, Raju will have to return Rs 145 for having borrowed Rs. 100 15 After 1 year 100 15 After 2 years 15 100 15+15 = 30 15 After 3 years 100 15+15+15= 45

  9. Exercise: Simple Interest • Principle= 2000, Rate of interest= 12% annual, Time= 1 years. What is SI and final amount to be paid ? • Principle=2000, Rate of interest=12% annual, Time= 1.5 year. What is SI and final amount to be paid ?

  10. Compund Interest • In simple interest, the base or principle stays the same every year, and interest is just calculated on this same principle • In Compound interest, the base amount changes every year. The base amount for next year will be (principle + this year’s interest)

  11. What I just said means… • Raju: Principle=Rs. 100 Rate of interest = 10% (compounded annually) Time = 3 years 10 After 1 year 100 10 11+10=21 After 2 years 11 110 12.1+21=33.1 12.1 After 3 years 121 TOTAL:133.1

  12. Formula for Compound Interest P(1 + r)t Recollect previous example:P= Rs. 100 R= 10% = 0.1 t=3 years Thus, Total amount at end of 3 years= 100(1+0.1)3 = 100(1.331) = 133.1

  13. Exercise: Compound Interest • Principle= 2000, Rate of interest= 12% annual, Time= 2 years. What is final amount to be paid after 2 years ?

  14. Summary • There are twoways of calculating interest • In everyday life, compund interest is the way bankscalculate interest. • Simple interest is slow growth-good for you • Compund interest: beware.

  15. Exercises • Loremipsumdolorsitamet, consectetueradipiscingelit. Vivamus et magna. Fuscesedsemsed magna suscipitegestas. • Loremipsumdolorsitamet, consectetueradipiscingelit. Vivamus et magna. Fuscesedsemsed magna suscipitegestas.

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