SIMPLE
INTEREST AND COMPOUND interest
A
Project Paper Submitted in Partial Fulfilment for the Award of the +2 1st
year Commerce department
Submitted
to:
Department of commerce
Higher
Secondary School, Semiliguda
Submitted by:
Name:-
Name of the Institute:
Paper
On:
Roll
No:
Date of Submission: Signature
SEMILIGUDA J R COLLEGE, SEMILIGUDA
Simple Interest
Simple interest is a
method to calculate the amount of interest charged on a sum at a given rate and
for a given period of time. In simple interest, the principal amount is always
the same, unlike compound interest where we add the interest of previous years
principal to calculate the interest of the next year.
In this lesson, you
will be introduced to the concept of borrowing money and the simple interest
that is derived from borrowing. You will also be introduced to terms such as
principal, amount, rate of interest, and time period. Through these terms, you
can calculate simple interest using the simple interest formula.
What
is Simple Interest?
Simple interest is a
quick and easy method to calculate interest on the money, in the simple
interest method interest always applies to the original principal amount,
with the same rate of interest
for every time cycle. When we invest our money in any bank, the bank provides
us interest on our amount. The interest applied by the banks is of many
types one of them is simple interest. Now, before going deeper into the concept of simple interest,
let's first understand what is the meaning
of a loan.
A loan is an amount
that a person borrows from a bank or a financial authority to fulfill their
needs. Loan examples include home loans, car loans, education loans, and
personal loans. A loan amount is required to be returned by the person to the
authorities on time with an extra amount, which is usually the interest you pay
on the loan.
Simple Interest Formula
Simple interest is
calculated with the following formula: S.I. = P × R ×
T, where P = Principal, R = Rate of Interest in % per annum, and
T = Time, usually calculated
as the number of years. The rate of interest is in percentage r% and
is to be written as r/100.
·
Principal: The principal is the
amount that initially borrowed from the bank or invested. The principal is
denoted by P.
·
Rate: Rate is the rate of
interest at which the principal amount is given to someone for a certain time,
the rate of interest can be 5%, 10%, or 13%, etc. The rate of interest is
denoted by R.
·
Time: Time is the duration for
which the principal amount is given to someone. Time is denoted by T.
·
Amount: When a
person takes a loan from a bank, he/she has to return the principal
borrowed plus the interest amount, and this total returned is called
Amount.
Amount =
Principal + Simple Interest
A = P + S.I.
A = P + PRT
A = P(1 + RT)
Principal Amount = $1,000, Rate
of Interest = 5% = 5/100. (Add a sentence here describing the given information
in the question.)
|
|
Simple Interest
|
|
1 Year
|
S.I
= (1000 ×5 × 1)/100 = 50
|
|
2 Year
|
S.I
= (1000 × 5 × 2)/100 = 100
|
|
3 Year
|
S.I
= (1000 ×5 × 3)/100 = 150
|
|
10 Year
|
S.I
= (1000 × 5 × 10)/100 = 500
|
Now, we can also
prepare a table for the above question adding the amount to be returned after
the given time period.
|
|
Simple Interest
|
Amount
|
|
1 Year
|
S.I
= (1000 ×5 × 1)/100 = 50
|
A=
1000 + 50 = 1050
|
|
2 Year
|
S.I
= (1000 ×5 × 2)/100 = 100
|
A=
1000 + 100 = 1100
|
|
3 Year
|
S.I
= (1000 × 5 × 3)/100 = 150
|
A
= 1000 + 150 = 1150
|
|
10 Year
|
S.I
= (1000 × 5 × 10)/100 = 500
|
A
= 1000 + 500 = 1500
|
What Types of Loans use
Simple Interest?
Most banks these
days apply compound interest on
loans because in this way banks get more money as interest
from their customers, but this method is more complex and hard to explain to
the customers. On the other hand, calculations become easy when
banks apply simple interest methods. Simple interest is much useful
when a customer wants a loan for a short period of time, for example,
1 month, 2 months, or 6 months.
When someone goes for a
short-term loan using simple interest, the interest applies on a daily or
weekly basis instead of a yearly basis. Consider that you borrowed
$10,000 on simple interest at a 10% interest rate per year, so this 10% a
year rate divide into a rate per day which is equal to 10/365 = 0.027%. So you
have to pay $2.73 a day extra on $10,000.
Simple Interest vs Compound
Interest
Simple interest and
compound interest are two ways to calculate interest on a loan amount. It is
believed that compound interest is more difficult to calculate than simple
interest because of some basic differences in both. Let's understand the
difference between simple interest and compound interest through the table
given below:
|
Simple Interest
|
Compound Interest
|
|
Simple
interest is calculated on the original principal amount every time.
|
Compound
interest is calculated on the accumulated sum of principal and interest.
|
|
It
is calculated using the following formula: S.I.= P × R × T
|
It
is calculated using the following formula: C.I.= P × (1+r)t - P
|
|
It
is equal for every year on a certain principal.
|
It
is different for every span of the time period as it is calculated on the
amount and not principal.
|
CONCLUSION:
In practice, simple interest
is applied where a business needs to minimize its risk of borrowing. A simple interest rate is in nature favourable for the borrower because of a fixed cash
outflow. Compound interest is suitable for savings because it has a multiplier
effect therefore investments in
compound interest rates are normally for longer periods.
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