Interest

QUANTITATIVE APTITUDE

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Interest

Definition
Interest : Interest is the amount to be paid on the borrowed money or the amount
received on the money lent.
Principal : The borrowed money or the lent money is called Principal.
Amount : The sum of the interest and the principal is called the Amount.
Interest Rate: The rate at which the interest is charged on the principal is called Rate of
Interest.
Time : The period, for which the money is borrowed or deposited is called Time.

Interest can be classified in two types:

1) Simple Interest
2) Compound Interest

Simple Interest
When the interest is calculated only on the Principal for every year, it is called Simple
Interest.
Simple Interest can be calculated by the formula:

P r t
S.I. 
100

Where, P = Principal, r = Rate of interest per year, t = Time period in years

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Points to Remember
 When the time period is given in months, we convert it into year by dividing it by 12.
 When the time period is given in days, we convert it into year by dividing it by 365.

Q. Rs.1080 invested for 3 months gave an interest of Rs.27. The simple rate of
interest per annum was:
A. 3 months = 3/12 years
SI = (P × r × t)/100
⇒ 27 = (1080 × r × 3/12)/100
⇒ 27 = (90 × r × 3)/100
⇒ 27 = 270r/100
∴ r = 10%.

Compound Interest
It is the interest paid on the original principal amount and the accumulated past interest.
Formulas related to compound Interest:
t
 r 
A  P  1 
 100 

C.I.  A  P
 r 
t

C.I.  P  1   1
 100  

Where, A = Amount, P = Principal, r = Rate of interest, t = Time period

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Points to Remember
 When rate is compounded half yearly, then we take rate half and time double, then
2t
  r 
 2
A  P  1   
 100 
 
 
 When rate is compounded quarterly, then we take rate one fourth and time 4 times,
then 4t
  r 
 4
A  P  1   
 100 
 
 

 If rate of compound interest differs from year to year, then

 r₁   r₂   r₃ 
A  P  1   1   1 
 100   100   100 

Q. Find compound interest on Rs.50000 at 12% per annum for 1 year if

compounded half yearly.
2t 21
 r   12 
A.    
Amount  P  1  2   50000  1  2 
 100   100 
   
2 2
 6   106 
 50000  1   50000    Rs 56180
 100   100 

∴ C.I. = A – P = 56180 – 50000 = Rs 6180.

Q. What will be the amount if a sum of Rs.25000 is placed at CI for 3 years while
rate of interest for the first, second, and third years is 4%, 8%, and 10%,
respectively?

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A. A = P (1 + r1/100)(1 + r2/100)(1 + r3/100)

= 25000 (1 + 4/100) (1 + 8/100) (1 + 10/100)
= 25000 (104/100) (108/100) (110/100) = 30888.

Testbook Trick
 Effective rate of interest (C.I.) for 2 years,
xy
R xy
100
where, x = rate of interest for 1 year, y = rate of interest for 2nd year
st

 If rate of interest (C.I.) is same for both years, then

x2
R  2x 
100

 Effective rate of interest (C.I.) for 3 years, R = 3a.3a2a3

In this case the difference between effective rate of compound interest and simple
interest is given by 0.3a2a3 (3a.3a2a3 – 3a)

Tree-method
In this method we assume principle (on the basis of rate and time given) such that it
ease our calculation part and at the last we compare it to the value given in question to
get required answer.

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For example – If we 10% interest rate is given for 2 years then we will assume principle
as Rs. 100 and if times is 3 years then we will assume principle as Rs. 1000. It is done
to avoid any calculation in decimal form.

Q. Find compound interest for principle Rs 10000, time = 3 years and rate = 10%.

A. Normal Method:
t 3 3
 r   10   11 
Amount  P1   100001  10000   Rs.13310
 100   100   10 
C.I.  A  P  10000  13310  Rs. 3310

Tree Method:
Step 1: Take principle (Rs 10000 here).
Step 2: For year at 10%, interest =
Rs. 1000
For 2nd year, total interest =
interest on principle +
interest on interest of 1st year =
1000 + 100 = Rs. 1100
For 3rd year, total interest =
interest on principle +
interest on interest of 1st year +
interest on interest of 2nd year =
1000 + 100 + 100 + 10 = Rs. 1210
Step 3: Add all interests = 1000 + 1100 + 1210 = Rs. 3310.

Effective Rate method:

Effective rate for 3 years at rate of 10% = 3a.3a2a3 = 33.1 %
Hence, compound interest = 10000 × 33.1% = Rs. 3310.

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Q. Rs.9200 is invested at compound interest at the rate of 25% per annum for 2

A. Normal Method:
Compound interest = P × [(1 + r/100)t – 1]
∴ Compound interest earned = 9200 × [(1 + 25/100)2 – 1] = 9200 × 0.5625 = Rs.
5175
Tree Method:

25% = 1/4 ⇒

Effective Rate method:

Effective rate = x + y + xy/100 = 25 + 25 + (25 × 25)/100 = 56.25%
Hence, C.I. = 9200 × 56.25% = Rs 5175

Testbook Trick
Pr²
 The difference (D) between S.I and C.I for 2 years is given by: D 
104

Pr²  r  300 
 The difference between S.I and C.I for 3 years is given by: D 
106

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Q. What will be the difference between the compound interest and simple interest
on Rs.3000 at 10% rate of interest for 2 years?
A. D = PR2/104
⇒ D = (3000 × 10²)/10000
∴ D = Rs.30

Q. What will be the difference between the compound interest and simple interest
on Rs.100000 at 10% rate of interest for 3 years?
A. Solution:
D = PR2(R + 300)/106
⇒ D = 100000 × 10²(10 + 300)/106
∴ D = Rs. 3100
Alternate Method:
Difference between effective rate of compound
interest and simple interest = 3.1%
∴ Required difference = 1,00,000 × 3.1% = Rs.
3100

Installment
When the sum of an amount is paid in parts, then each part of the amount paid is called
installment.
  x  r  1  xr 2   xr 3  
For simple interest: A  x   x    x   x    
  100   100   100  

Where A = Total amount paid, x = Value of each installment, r = Rate of interest

For compound interest:
 
 
x x x
P    
 r   r 
2
 r  
  1  100   1    1  100  ³ 
   100    
P = Loan amount, x = Value of each installment, r = Rate of interest

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Q. The oven set is bought on 4 yearly installments at 10% simple interest. If equal
instalments of Rs.2500 are made then find the amount to be paid as price of
oven set.
  x  r 1
  xr 2
  xr 3
 
A. A  x   x     x  100    x  100   
  100      
  2500  10  1  2500  10  2   2500  10  3 
 2500  2500    2500    2500  
  100   100   100 
= 2500 + 2500 + 250 + 2500 + 500 + 2500 + 750 = 11500
∴ Price of oven set is Rs.11500.
Alternate Method:
Given rate = 10% and time = 4 years
Let installment be Rs 100
Then, price = 1st payment + 2nd payment + 3rd payment + 4th payment = 100 + 110 +
120 + 130 = 460
Comparing with given installment, we get price, P = 2500 × 460/100 = Rs.11500

Q. A sum of Rs. P was borrowed and paid back in two equal yearly instalments,
each of Rs. 35,280. If the rate of interest was 5% compounded annually, then
the value of P is:
 
 
x x x
A. P    
 r   r 
2
 r  
  1  100   1    1  100  ³ 
    100    
P = [35,280/(1 + 5/100) + 35,280/(1 + 5/100)2]
= [35,280 × (20/21)] + [35,280 × (20/21)²]
= 33,600 + 32,000 = Rs 65,600

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