1. Calculating Simple 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
Exercise your newfound knowledge!

3. Interest Raju needs money Bank and Raju write down : How much ?=Rs.100
Time being borrwed for ?=2 year
Bank calculates the amount Raju has to return after 2 years
For this service that bank gave to raju, it charges a fee. This fee is nothing 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 will owe the bank Rs. 120
TIME
Amount borrowed
Interest to be paid
Total that raju has to pay
After 1 year
100 10 10
After 2 years
100 10
10+10=20

7. The math of it An easier way to do this -> use formula
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) = = 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
TIME
Amount borrowed
Interest to be paid
Total interest that Raju has to pay
After 1 year
100 15 15
After 2 years
100 15
15+15 = 30
Lets say Raju had borrowed 100 Rs. But interest rate was 15% and this time, he borrowed it for 3 years.
What would be the amount raju has to pay the bank at the end of 3 years ?
After 3 years
100 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
TIME
Amount borrowed
Interest to be paid for that year
Total interest so far
After 1 year
100 10 10
After 2 years
110 11
11+10=21
After 3 years
121
12.1
=33.1
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 two ways of calculating interest
In everyday life, compund interest is the way banks calculate interest.
Simple interest is slow growth-good for you
Compund interest: beware.

15. Exercises
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