UGC NET PAPER 1 · UNIT 05 · MODULE 4: RATIO, PERCENTAGE AND MONEY · TOPIC 11

Simple Interest, Compound Interest and Discounting

Simple and compound interest, the CI minus SI shortcut, instalments and true versus banker's discount.

  • 8 sub-topics
  • 5 min read
  • Topic 11 of 17

What this topic covers

8 sub-topics, in the order to study them. Tap one to jump to it.

  1. §OverviewInterest is the price paid for using money.
  2. 11.1TermsCovers Principal (P), Amount (A).
    • Principal (P)
    • Rate (R)
    • Time (T or n)
    • Amount (A)
  3. 11.2Core formulasConcept Formula Simple interest SI = P x R x T/100 Amount under SI A = P + SI = P(1 + RT/100) Principal from SI P = SI x 100/(R x T) Rate from SI R = SI x 100/(P x T) Time…
  4. 11.3SI versus CICovers Effective rates for CI.
    • Effective rates for CI
  5. 11.4Equal instalments (CI)If a loan is repaid in equal annual instalments of x at R% compound interest, the loan equals the sum of the present values of the instalments: P = x/(1 + R/100) + x/(1 +…
  6. 11.5True discount and banker's discountCovers Face value (FV), True discount (TD), Banker's discount (BD).
    • Face value (FV)
    • present worth (PW)
    • True discount (TD)
    • Banker's discount (BD)
    • Example
  7. 11.6Worked examplesExample 1.
    • Example 1
    • 1200
    • 6200
    • Example 2
    • 2100
  8. 11.7TricksCovers CI as a chain of percentages, Use the difference formula, Spot the compounding period, Year-by-year CI.
    • CI as a chain of percentages
    • Use the difference formula
    • Spot the compounding period
    • Year-by-year CI
  9. 11.8TrapsForgetting to subtract the principal to find CI. Using R and n directly when compounding is half-yearly or quarterly. Using months in the formula without converting to…

Revision mode hides the full explanations and keeps each section's key terms, lists and tables. Use it from your second read onward.

§Overview#

Interest is the price paid for using money. The syllabus pairs "interest" with "discounting", so this section covers both simple and compound interest and the true and banker's discount.

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11.1Terms#

In brief

Covers Principal (P), Amount (A).

  • Principal (P)
  • Rate (R)
  • Time (T or n)
  • Amount (A)
  • Principal (P): the sum borrowed or lent. Rate (R): interest per 100 per year unless stated otherwise. Time (T or n): in years.

  • Amount (A) = principal + interest.

  • Convert time to years: months divided by 12, days divided by 365.

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11.2Core formulas#

In brief

Concept Formula Simple interest SI = P x R x T/100 Amount under SI A = P + SI = P(1 + RT/100) Principal from SI P = SI x 100/(R x T) Rate from SI R = SI x 100/(P x T) Time…

Concept Formula
Simple interest SI = P x R x T/100
Amount under SI A = P + SI = P(1 + RT/100)
Principal from SI P = SI x 100/(R x T)
Rate from SI R = SI x 100/(P x T)
Time from SI T = SI x 100/(P x R)
Amount under CI (annual compounding) A = P(1 + R/100)^n
Compound interest CI = A - P
Half-yearly compounding Rate R/2, periods 2n
Quarterly compounding Rate R/4, periods 4n
Different rates R1, R2, R3 in successive years A = P(1 + R1/100)(1 + R2/100)(1 + R3/100)
Fractional time (for example 2 and a half years) A = P(1 + R/100)^2 x (1 + (R/2)/100)
CI minus SI for 2 years P(R/100) squared
CI minus SI for 3 years P(R/100) squared x (3 + R/100)
Time for a sum to become n times (SI) (n - 1) x 100/R years
Doubling time under SI 100/R years
Doubling time under CI (rule of 72, approximate) 72/R years

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11.3SI versus CI#

In brief

Covers Effective rates for CI.

  • Effective rates for CI
  • Simple interest is the same every year, so it grows in a straight line.

  • Compound interest is paid on the principal and on the accumulated interest, so it grows faster, and the gap widens over time.

  • For the first year with annual compounding, SI and CI are equal.

  • Effective rates for CI: 2 years at R% is equivalent to a single rise of 2R + R squared/100 percent (10% for 2 years gives 21%); 3 years at 10% gives 33.1%.

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11.4Equal instalments (CI)#

In brief

If a loan is repaid in equal annual instalments of x at R% compound interest, the loan equals the sum of the present values of the instalments: P = x/(1 + R/100) + x/(1 +…

If a loan is repaid in equal annual instalments of x at R% compound interest, the loan equals the sum of the present values of the instalments: P = x/(1 + R/100) + x/(1 + R/100)^2 + ...

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11.5True discount and banker's discount#

In brief

Covers Face value (FV), True discount (TD), Banker's discount (BD).

  • Face value (FV)
  • present worth (PW)
  • True discount (TD)
  • Banker's discount (BD)
  • Example
  • Face value (FV) is the amount due at the end of the time; present worth (PW) is the sum that, put at interest, grows to FV in that time.

  • True discount (TD) = FV - PW, which equals the simple interest on PW.

  • Banker's discount (BD) = simple interest on the face value for the unexpired time.

Concept Formula
Present worth PW = FV x 100/(100 + RT)
True discount TD = FV x RT/(100 + RT), or PW x RT/100
Banker's discount BD = FV x RT/100
Banker's gain BG = BD - TD = TD squared/PW

Example. A bill of 1100 is due in 1 year and the rate is 10%.

  • PW = 1100 x 100/110 = 1000. TD = 100. BD = 1100 x 10 x 1/100 = 110. BG = 10, and TD squared/PW = 10000/1000 = 10, which agrees.

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11.6Worked examples#

In brief

Example 1.

  • Example 1
  • 1200
  • 6200
  • Example 2
  • 2100
  • 100
  • Example 3
  • 8820

Example 1. Find the SI and amount on 5000 at 8% for 3 years.

  • SI = 5000 x 8 x 3/100 = 1200. Amount = 6200.

Example 2. Find the CI on 10,000 at 10% for 2 years, and its difference from SI.

  • A = 10,000 x 1.1 x 1.1 = 12,100, so CI = 2100. SI = 2000, so the difference is 100, which matches P(R/100) squared = 10,000 x 0.01.

Example 3. Find the amount on 8000 at 10% per annum for 1 year, compounded half-yearly.

  • Rate 5% for 2 periods: 8000 x 1.05 x 1.05 = 8820 (CI = 820).

Example 4. At 10% simple interest, in how many years will a sum triple?

  • (3 - 1) x 100/10 = 20 years.

Example 5. In what time does 1000 become 1331 at 10% compound interest?

  • 1331 = 1000 x 1.1^3, so 3 years.

Example 6. A sum becomes 1.5 times in some years at 5% SI. Find the time.

  • (1.5 - 1) x 100/5 = 10 years.

Example 7. A loan is repaid in two equal annual instalments of 1210 at 10% compound interest. Find the loan.

  • P = 1210/1.1 + 1210/1.21 = 1100 + 1000 = 2100.

Example 8. 10,000 is invested for two years, with a 10% rate in the first year and 20% in the second, compounded annually.

  • A = 10,000 x 1.1 x 1.2 = 13,200.

Example 9. Approximate doubling time at 8% compound interest.

  • 72/8 = 9 years (and 1.08^9 is about 2.0).

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11.7Tricks#

In brief

Covers CI as a chain of percentages, Use the difference formula, Spot the compounding period, Year-by-year CI.

  • CI as a chain of percentages
  • Use the difference formula
  • Spot the compounding period
  • Year-by-year CI
  • CI as a chain of percentages: treat each year as a percentage rise and use the multiplier method (CI at 10% for 3 years is 1.1^3 = 1.331, a 33.1% rise).

  • Use the difference formula when the question gives CI minus SI for 2 or 3 years, to find P or R directly.

  • Spot the compounding period: half-yearly, quarterly and monthly compounding change both the rate and the number of periods, in the same proportion.

  • Year-by-year CI: the CI earned in the nth year alone equals one year's simple interest on the amount at the end of year n-1.

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11.8Traps#

In brief

Forgetting to subtract the principal to find CI. Using R and n directly when compounding is half-yearly or quarterly. Using months in the formula without converting to…

  • Forgetting to subtract the principal to find CI.

  • Using R and n directly when compounding is half-yearly or quarterly.

  • Using months in the formula without converting to years.

  • Mixing up true discount (on present worth) with banker's discount (on face value).

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