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Placement Preparation
**Specialization:
**Quantitative Aptitude**Offline Downloads:
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Today, we are going to discuss a very interesting topic Simple and
Compound interest.
It deals with the money matters. By the end of it, we shall be
familiar with the basic formulas used for the calculation of simple
and compound interest and their practical applications.
Various terms to be used along with their general representation
are:
Interest
It is money paid by borrower for using the lender's money for a
specified period of time. Denoted by I.
Principal
The original sum borrowed. Denoted by P.
Time
Time is a period for which the money is borrowed. Denoted by n
Rate of Interest
Rate at which interest is calculated on the original sum. Denoted
by r.
Amount
Sum of Principal and Interest and is denoted by A.
Simple Interest
The interest calculated every year on original principal, i.e. the sum
at the beginning of first year. It is denoted by SI.
SI = Pnr

A=P+SI
Compound Interest
The interest is added to the principal at the end of each period to
arrive at the new principal for the next period.
OR
The amount at the end of year will become principal for the next
year and so on.
Let P be principal borrowed at the beginning of period 1.
Amount at end of period n=1 is
A= P (1+r/100)
Then,
New Principal at the beginning of period 2 will be A i.e. P (1+r/100)
= P*R where R=(1+r/100).
Lets’ checkout the applicability of the above concept with an
example
Consider P at the beginning of year of Rs 100 and r=10% p.a. Now,
for the next three years the calculation of simple and compound
interest is as follows:

Under Simple Interest
Under compound interest
Interest
Principal
Interest till the
at
for the end of
Year
beginning
year
the
of year
year
Amount
at the
end of
the
year
Interest
Principal
Interest till the
at the
beginning for the end of
year
the
of the
year
year
Amount
at the
end of
the
year
1
100
10
10
110
100
10
10
110
2
100
10
20
120
110
11
21
121
3
100
10
30
130
121
12.1
33.1
133.1
As can be seen from table,
UNDER SIMPLE INTEREST
UNDER COMPOUND INTEREST
P is same for every year
A at the end of every year = P
for next year
I is same for every year
I is different for each year.
Hope you are clear with the ‘interesting aspect of this topic!

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