FACULTY GUIDANCE NOTES FOR

SIMPLE INTEREST AND COMPOUND INTEREST

(Ref: FGN101003)
Examples to be taken in the class:
Introduction:
Ex 1:
The table gives an example of how simple interest (SI) and compound interest (CI) operate. The principal at the
beginning of 1st year, of Rs.10000 and a rate of 10% p.a. are considered. The details for 5 years are shown.
Principal at the
Year beginning of
the year
1
10000
2
10000
3
10000
4
10000
5
10000
All figures are in Rs.

Under SI
Under CI
Interest Interest till Amount at Principal at Interest Interest till Amount at
for the
the end of the end of the beginning for the the end of the end of
year
the year
the year
of the year
year
the year
the year
1000
1000
11000
10000
1000
1000
11000
1000
2000
12000
11000
1100
2100
12100
1000
3000
13000
12100
1210
3310
13310
1000
4000
14000
13310
1331
4641
14641
1000
5000
15000
14641
1464.1
6105.1
16105.1
AP
AP
GP
GP
GP

Ex 15:

A sum of money triples at compound interest

in 7 years. In how many years will it become
27 times itself?

Ex 16: Find the difference between the SI and CI

(compounded annually) on Rs.500 at
10% p.a. for 2 years.
Ex 17: At what rate of SI will a sum become five
times itself in 20 years?
Ex 18: Saritha invested Rs.50,000 for 3 years,
interest being compounded annually. If the
rate of interest is 8%, 10% and 12%
respectively for 1st, 2nd and 3rd years, then
find the interest earned by Saritha.

Faculty member can quickly write the below mentioned table on top half of the board and should go on to explain
the observations that can be made from it.
The table gives an example of how simple interest (SI) and compound interest (CI) operate. The principal at the
beginning of 1st year, of Rs.10000 and a rate of 10% p.a. are considered. The details for 5 years are shown.
Principal at the
Year beginning of
the year
1
10000
2
10000
3
10000
4
10000
5
10000
All figures are in Rs.

Under SI
Under CI
Interest Interest till Amount at Principal at Interest Interest till Amount at
for the
the end of the end of the beginning for the the end of the end of
year
the year
the year
of the year
year
the year
the year
1000
1000
11000
10000
1000
1000
11000
1000
2000
12000
11000
1100
2100
12100
1000
3000
13000
12100
1210
3310
13310
1000
4000
14000
13310
1331
4641
14641
1000
5000
15000
14641
1464.1
6105.1
16105.1
AP
AP
GP
GP
GP

Observations that can be made (Comparison between SI and CI):

SI

CI

1. Principal at the beginning of each year is same 1. Principal at the beginning of each year is different and
i.e., principal for any 2 years remains same.
the amount at the end of a year is the principal for the
consecutive year.
2. The interest for any two years remains constant.

2. The interest for no two years is the same.

3. Faculty should emphasize here that, year after 3. The interest is added to the principal at the end of
year, even though the interest gets accumulated
each compounding period (1 year in this case) to
and is due to the lender, this accumulated interest
arrive at the new principal for the next compounding
is not taken into account for the purpose of
period. In other words, the amount at the end of each
calculating interest for later years.
compounding period would be the principal for the
next compounding period.
4. Interest till the end of consecutive years and 4. Interest for the successive years, amount at the end of
amount at the end of consecutive years are in A.P.
consecutive years are in G.P.
F.M. may take the following question and show the students as to how the table can be used.

i.e., 1230 - 1200 =

600

(because SI for 2 years = 1200, hence SI for

1 year =

= 600)

30 = 6r
r = 5%
SI =

100

600 =

100
P = 12000
3.

The difference between the CI for k years and CI

for (k + 1) years is equal to the interest for one
year on the amount at the end of kth year.
i.e., CI(for k + 1 years) - CI(for k years)
=

4.

100

A (end

of k th

year)

The above mentioned point can

expressed in terms of the amount.
i.e., CA(for k + 1 years) - CA(for k years)
=

100

A (end

of k th

also

be

year)

Ex 4:

A sum under CI, interest being compounded

annually amounts to Rs.6000 in two years
and Rs.7200 in three years. Find the rate of
interest.

Sol:

As we already know that

CAfor 3 years - CAfor 2 years =
7200 - 6000 =

CAfor 2 years
100

6000

100

1200 = 60r
r = 20%
5.

The difference between the CI for the kth year and

the CI for the (k + 1)th year is equal to the interest
for one year on CI for the kth year.
CIfor

(k +1)th year

- CIfor kth

year

CIfor
100

kth year

Ex 5:

The compound interest on a certain sum for

the third and the fourth years is Rs.1815 and
Rs.1996.5 respectively. What is the rate of
interest?

Sol:

We know that
CIfor

(k +1)th year

CIfor

4th year

- CIfor kth

- CIfor 3rd

year

year

CIfor
100
CIfor
100

kth year

3rd year

Compounding more than once in a year:

Compounding can also be done more frequently than
once in a year i.e., once in every six months, every 4
months, every 3 months, every month etc.
If the compounding is done more than once in a year,
then in the earlier discussed formula for
n

An = P 1+

100

where r = rate of interest per annum should be

changed to rate of interest per compounding period.
i.e., given r% per annum,
rnew =

per compounding period

k
where k is number of compounding periods in a year.
Similarly, n in the formula where n = number of years
should be changed to total number of compounding
periods.
i.e. nnew = k n where k is number of compounding
periods in a year.
Ex: Given r = 12% p.a. and n = 2 years, then
(a) if compounding is done half yearly (i.e.

P 1+

100

=X

100

+X

100

+...

. . + X.
Ex 11:

In 8 years, a certain sum doubles itself under

simple interest. In how many years will the
sum becomes three times itself?

Sol:

Time taken to earn interest (which is 100% of

the principal) is 8 years.
Time taken to earn interest, (which is
200% the principal) is

100

200 = 16 years.

Ex 12:

A sum of money triples at compound interest

in 7 years. In how many years will it become
27 times itself?

Sol:

Let the sum be Rs.P.

Given, that the sum triples (i.e., it becomes
3P) after 7 years.
Now, the sum becomes 9P in the next 7
years i.e., in 14 years (e times of 3). Then the
sum becomes 27P in the next 7 years i.e., in
21 years (3 times + 9P).

Ex 13: Find the difference between the SI and CI

(compounded annually) on Rs.500 at
10% p.a. for 2 years.
Sol:

Difference between CI and SI on Rs.P at r%

1st year

SI
256k

CI
320k

2nd year

256k

340k 320 +

16

320

----------512k
660k
Difference between interests is
660k - 512k = 148k
148k Rs.37
k=

P = 5120
Ex 17:

= 1280.

Given the difference between SI for 2 years

and CI for 2 years on the same sum and at
the same rate of interest compounded
annually is Rs.120. The difference between
SI for 3 years and CI for 3 years on the same
sum and at the same rate of interest is
Rs.366. Find the rate of interest.

Sol:

-P

= 366

100

r
100
r
100

366
120

100