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Tips on Answering Questions Based on Simple & Compound Interest

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Tips on Answering Questions Based on Simple & Compound Interest

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  1. 3 TIPS on cracking Aptitude Questions on Simple and Compound Interest

  2. Tip #1: Understand the formulae: Amount to be repaid after N years if simple interest is applied = P + (P x N x R) = P (1 + N x R) Simple Interest = P x N x R Amount to be repaid after N years if interest is compounded = P [(1 + R)^N] Compound Interest = [P x (1 + R)^N] - P • Question: Simple interest on a certain sum of money for 3 years at 8% per annum is half the compound interest on Rs. 4000 for 2 years at 10% per annum. Calculate the principal placed on simple interest. • Solution: • Let the Principal be Rs. P. • Then, SI = (P x R x T) = 0.24P • Given CI = 4000(1 + 0.1)2 – 4000 = 4000(1.21 – 1) =4000 x 0.21 • According to the question, • 0.24P = 2000 x 0.21 • P = 2000 x 0.21 / 0.24 = 2000 x 7 / 8 = Rs. 1750

  3. Tip #2: If the interest rate is applied on a half-yearly, quarterly or monthly basis, the effective annual rate is calculated by compounding the interest. • Question: What is the effective annual rate of interest corresponding to a nominal rate of 6% per annum payable half-yearly? • Solution: • Let the Principal be Rs. P. • Now, the rate is 6% per annum but the interest has to be paid twice a year (i.e.) an interest of 3% is applied every 6 months. • Amount to be repaid after 1 year = P x 1.03 x 1.03 = 1.0609P • Effective Annual Rate of interest = 6.09%

  4. Tip #3: Use logarithms to find the time when compound rates are applied • log 2 = 0.301 log 4 = 0.602 log 6 = 0.778 • log 3 = 0.477 log 5 = 0.699 log 7 = 0.845 • Question: At 3% annual interest compounded monthly, how long will it take to double your money? • Solution: • Let the number of months be n and the Principal be Rs. P. • Then, P(1 + 0.03)n = 2P • (1 + 0.03)n = 2 • n log ( 1.03) = log 2 • n = log 2 / log 1.03 = 0.301 / 0.128 = 23.5 • Thus. It’ll take 1 year and 11.5 months.

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