Simple Interest and Compound Interest: Simple interest is calculated on the principal amount, or on that portion of the principal amount which remains unpaid. Simple Interest is straightforward and does not take into account the effect of interest on interest. It is typically easier to calculate. Simple interest is an easy and quick method to calculate interest on money. With simple interest, the interest is always applied to the original principal amount, using a fixed interest rate for each period of the loan. A loan is an agreement between a bank or financial institution and an individual who borrows money to meet their needs, typically in exchange for a mortgage.
Compound Interest
Compound interest is calculated on the initial principal, including all the accumulated interest from previous periods on a deposit or loan. Compound interest, or compounding interest, is the interest on a loan or deposit calculated based on the initial principal amount and the accumulated interest from previous periods. It can be thought of as “interest on interest,” causing the sum to grow much faster.
- Principal (P): The initial amount of money invested or loaned.
- Rate of Interest (R): The percentage at which interest is charged or earned per time period, usually per year.
- Time (T): The duration for which the money is invested or borrowed, typically in years.
- Amount (A): The total amount of money accumulated after interest is applied.
Compound Interest and Simple Interest Formula
Weightage of Compound Interest and Simple Interest Questions
The weightage of “SI/CI” questions can vary depending on the specific exam and the overall structure of the test. Here’s a general overview:
Importance and Weightage:
- Quantitative Aptitude Section:
- Frequency: “SI/CI” questions frequently appear in this section.
- Weightage: Typically, you can expect 2-5 questions out of 35-50 in exams like IBPS PO, SBI PO, RBI Grade B, and clerical exams.
- Exam-Specific Insights:
- IBPS PO: Often includes 2-3 “SI/CI” questions.
- SBI PO: Similar pattern with 2-3 questions.
- RBI Grade B: This can vary but usually includes a couple of questions.
- Clerical Exams: Slightly fewer questions, around 1-2, but still important.
Compound Interest and Simple Interest Solved Problems
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Previous year Simple Interest and Compound Interest based Questions
Q1. A sum of $5000 is invested at a simple interest rate of 8% per annum for 3 years. Calculate the total amount accumulated after 3 years.
Q2. An amount of $10,000 is invested at a compound interest rate of 6% per annum, compounded annually. Calculate the total amount accumulated after 2 years.
Q3. Mark took a loan of $12,000 at a compound interest rate of 10% per annum, compounded annually. He repaid the loan after 2 years. Calculate the total amount Mark repaid and the difference between compound interest and simple interest for the same period.
Q4. Jane deposits $8000 in a savings account that pays a simple interest rate of 5% per annum. How much interest will Jane earn after 4 years?
Q5. Robert invests $10,000 in a fixed deposit at a compound interest rate of 8% per annum, compounded annually. Calculate the amount Robert will have after 3 years.
Q6. Sarah borrows $15,000 at a compound interest rate of 12% per annum, compounded semi-annually. She repays the loan after 2 years. Calculate the total amount Sarah repays and the difference between compound interest and simple interest for the same period
Compound Interest & Simple Interest FAQs
Ans. Simple Interest is a method of calculating interest where interest is only applied to the original principal amount (P) over the entire period of the loan or investment.
Ans. Simple Interest is typically used for short-term loans, like personal loans or short-term deposits, where interest does not compound over time.
Ans. Simple Interest only applies to the initial principal amount throughout the loan or investment period, whereas Compound Interest includes interest on both the principal and the accumulated interest from previous periods.
Ans. Compound Interest is a method of calculating interest where interest is calculated on the initial principal amount as well as on the accumulated interest from previous periods.
Ans. Compound Interest is commonly used in investments such as savings accounts, fixed deposits, mortgages, and long-term loans where interest is compounded regularly.
Ans. Effective interest rates take into account the effects of compounding and are calculated using the formula: Effective interest rate = 1+rnn-1 Where RRR is the nominal annual interest rate and n is the number of compounding periods per year.