The interest rate is calculated after considering the
inflation rate, risk on that investment etc.
There are two types of interest:-
- Simple interest
- Compound interest
1. Simple interest
is that interest which is earn on principal (borrowed) amount. It is calculated
on original amount invested or borrowed for specified period. Formula to
calculate simple interest (SI) is as follow:
SI=P*R*T
Where,
P=the principal amount which is borrowed or invested.
R=the rate of interest which is charged on principal amount
borrowed or invested.
T=the time period for which principal amount borrowed or
invested.
For example - If a bank charge 5% p.a interest on Rs 20,000
for 5 ½ year. Then simple interest is calculated as:
SI=P*R*T
SI = 20000*5 (5+6)
---------- * ------
100 12
=500*11
= 5500
|
With the help of it
you can calculate interest on loan, interest on investment and added the principal
amount with the interest you will get total amount paid to bank. And the formula is-
A=P+ (PRT)
Where,
A=total amount paid or receive on
loan or investment
P=principal (borrowed or
invested) amount.
2.Compound interest is an interest which is added to the
principal amount to earn further interest on it. It is used to calculate total
loan amount, amount received after investment etc.
Compound interest calculated by
following ways:
a) Compounded
annually
b)Compounded
half yearly
c)Compounded
quarterly
d)Compounded
monthly
e)Compounded
continuously
Formulae to calculate compound interest:-
Compounded annually
|
Compounded half yearly
|
Compounded quarterly
|
Compounded monthly
|
Compounded continuously
|
|
Formulae
|
A=P(1+r/100)t
|
A=P(1+r/100*n)t*n
|
A=P(1+r/100*n)t*n
|
A=P(1+r/100*n)t*n
|
A=P*e
r*t
|
N (Value)
|
---------
|
2
|
4
|
12
|
Where,
A = the total amount
received or paid.
P = the principal amount which is borrowed or invested.
n = the rate of interest on principal amount (borrowed or
invested).
t = the time period for which principal amount borrowed or
invested.
n = number of periods interest added to the principal.
e = the scientific constant which is
equivalent to 2.718281828
a). Compounded annually:
Example: Ravi has recently open saving a/c in bank with Rs 25000 and bank charged 7%
per annum interest compounded annually
for 2 years. Find out compound interest?
A=P (1+r/100) t
=25000(1+7/100)
2
=25000(107/100)
2
A=28622.5
Compound interest (CI) = amount (A)-principal (P)
=28622.5-25000=3622.5
b). Compounded half yearly:
Example: Ravi has
opened saving a/c in 1st January with Rs 25000 and bank charged 7%
per annum interest compounded half yearly and he deposited Rs. 2500 per month
from March. Find out the total amount in his a/c after 3 years.
A=P (1+r/n) n*t
=50000(1+0.07/2) 2*1 + 55000(1+0.07/2) 2*2
=53561.25 + 63113.76
=116675.01
c). Compounded quarterly-
Example: Mr. Jai has taken a loan from bank of Rs.200000 and
bank charges 8% per annum interest compounded quarterly for 4 years. Calculate
amount paid after 4 years.
A=P (1+r/n) n*t
=200000(1+0.08/4) 4*4
=200000(1.02) 16
=274557.14
d). Compounded monthly-
Example:Ms. Nisha has invested Rs.30000 in National Saving
Certificate (NSC) for 5 years and earns 8 % per annum interest compounded
monthly. Find out the maturity amount.
A=P (1+r/n) n*t
= 30000(1+0.08/12) 12*5
=30000(1.0066) 60
=44695.38
e). Compounded continuously-
Example: Mr. Sharma has taken a home loan of Rs.10, 96,000
and bank charges 6% interest compounded continuously. Find the total amount
paid by Mr. Sharma after 8 years to bank.
A=P*e r*t
=1096000*e 0.06*8
=1771217.54
Calculations of Simple interest and Compound Interest in excel:
Simple interest:
A
|
B
|
|
1
|
Principal
|
25000
|
2
|
rate
|
8%
|
3
|
N
|
3
|
4
|
Simple interest
|
6000
|
B4 cell: “=B1*B2*B3”
Compound Interest:
A
|
B
|
|
1
|
Principal
|
25000
|
2
|
rate
|
8%
|
3
|
N
|
3
|
4
|
Compound interest
|
25060.05
|
B4 cell: "=B1*(1+(B2/100))^B3
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