MEANING OF INTEREST Interest is the lender of a certain for the borrower on Price that is payable for using the mone; 'y of another. It is payable by a borrower to the money. Thus, it is an income for the | lender from the amount lent and an expenditure Definition From the above meaning, the term ‘interes? cent per annum or otherwise by a borrower for BA ores oF interest According to the basis of calculation, interest and (ii) Compound interest. s SIMPLE INTEREST may be defined as "the price payable at a cel rain rate per using certain money of the lender for a certain period." interests are classified into two types. They are @ Simple A simple interest is one which is calcul: lated always at a fixed rate on the original amount of the Principal borrowed. Algebraically this is obtained by Pxnxr where, SI = Simple interest, P 100 is the common. denominator. \. To find the amount of interest at a certain rate pa ae a ILLUSTRATION 1. Find the Simple interest on & 75,000 @ 5% SOLUTION Given P= p.a. for 7 years, ,000 r= 5, and n =7,Compound Interes, 5_ 2 26,250 2 = 26. We have. si.= PARSE = 75,000 x7% 100 ce. the required amount of $.1. = % 26.250 Hence. the req i will earn a desired inc To find the principal that ILLUSTRATION 2. at 5% 7 years Determine the principal that will eam & 26,250. as sin 7 ¥ after 7 years. p.a. Also, find the amoun, SOLUTION Given Si. = 26,250, r=5,andn=7 We have, Sta nee 100 p= Si:x100 _ 26,250%100 _ 75 999, nxr 7xS Hence, th ired ‘ipal = % 75,000. lence. the required princip. =P +S. = 75,000 +% 26,250 Further. the amount at the end of an investment period is given by A 1.01.250, ILLUSTRATION 3. What sum will amount to % 4.50,000 in 10 years at 5% p.a. S.1 Let the sum or P be 100 Given n=10,r=5.Sd.= Mand A=P4 SI 100 0010 We have. sa, = WAN0*S 59 100 And A=P+S., = 100 +50=150 Now, when A is 150, P= 100 100 when A is 4,50,000, P= isola 4,50,000 = 3,00,000. Hence, % 3,00,000 will amount to € 4,50,000 in 10 years at 5% p.a, 100xA Toor gy hence 120%4,50,000 ae 100+ 10x5 Note. From the above working it follows that, P = 3,00,000. IIL. To find the rate of interest for a certain loan [ILLUSTRATION 4. / If Z 70,000 earns 35,000 as S.I. in 5 years, determine the rate of interest charged. Oe SOLUTION Pxnxr 100 = 35,000 n= 5 and §.1. = ; Pp =70,000, S.1. = 354 Given,Compound Interest S1.x100 _ 35,000%100 _ 1 Pn 70,000x5 Hence, the required rate of interest = 10% p.a, We have, 7 If 10,00% »mounts to % 13,500 in 7 years, find the rate of S.I. TT SOLUTION Given P = 10,000, A = 13,500, n=7, $1. = AP. We get, S.1. = 13,500-10,000 = 3,500 Par. = Six100 _ 3,500x100 Pn 10,0007 Hence, the required rate of interest = 5% p.a. IV. To find the time when the amount of Principal and interest is given eee ILLUSTRATION 6.) Determine the time in which a sum of € 1,20,000 fetches an interest of € 60,000 at 5% p.a. SOLUTION Given 60,000 and r = 5 n= SLX100 _ 60,000%100 Pr 1,20,000x5 = 10 ¥® Hence, the required time = 10 yrs. [ILLUSTRATION 7. | Find the interest on & 1,75,000 @ 8.75% p.a. for 6 months. SOLUTION Given, P= 1,75,000, r= 8.75, and n=— =05 Par _ 1,75,000x0.5x8.75 ‘The S.L. is given by $.L. = 22 = =P AXED = 87,656.25 100 © 100 Hence, the required interest = & 7,656.25 “ILLUSTRATION 8. : ‘An asset yields an annual income of € 7,200 for 10 years. Find the value of the asset and the rate of income. “SOLUTION ~ en We have, annual income or S.1.= 72,000, n= 10,V= nx SI. 100 9, n and ,Compound Interey, sof | ‘Thus (i) the value of the asset in terms V = 10 x 7,200 = & 72,000. oars’ purchase vr 100 ,, 100 = jo% pa. and (i) the rate of income or r= > OF 9 EXERCISE [G)) 5 years at simple interest , ; Li ich amounts to ¥ 7234.50 at 6 — % P.2.1 . Find the sum which amo 2 tAns. & 5,465 . f interest charged ; ermine the rate 2. IF% 1,600 earns & 200 as simple interest in 2 years, deter (Ans. 8 6259) TAns, 99) in 4 years ? i 3. At what rate percent will & 4,500 become € 6,120 in 4 Ys (Ans. $5 f simple interest. 4- IF 1,200 amounts to 1,500 in 5 years, find the rate of imple ANAT got a total amo imple i . The 5. A sum of & 550 was ent out for 2 years at simple interest. nad © 638. Find the rate of interest per cent per annum. 2 6. If the simple interest on a sum equals to aot itself in 4 years, find the rate per cent? (Ans. 244) 7 7. Determine the time in which a sum of € 2,400 fetches Z 120 as S.I. at 5% p.a. [Ans, 1 yeu} 8. In what time & 1,250 will amount to € 1,400 at 6% p.a. S.1.? [Ans. 2 yeas] 9. In what time a sum will be times of itself at 5% p.a. S.1. ? TAns. 38 yean 10. Digvijay borrowed & 1,500 at 5% p.a. After some time he returned & 1,800 and cleared t account. For how much time did he keep the money ? TAns, 4 yeas 11. In what time 5,000 will yield & 1,100 at 52%, [Ans, 4 yeas 2 12. An asset yields an annual income of & 25,000 for 5 years. Find the value of the asset and th rate of income. [Ans. & 1,25,000, 208 3 sCOMPOUND INTEREST a principal and the earlier interests left unpaid. Thus, this interest at the end of every period is converted into The procedure of calculating such interests may be shown Leta sum of & 100 be invested at 4% per annum for3 years, ¢ Thus, Amount at the end of the first year : the principal for the next period. through an example as under: “ompounded annually. 4 = 0 x —~ =%104 100 + 100 x Tooa ‘Compound Interest ‘Amount at the end of the 2nd year : 4 =104+104 x2. = R044 4.16 =F 108.16 104+1( *T00 Amount at the end of the third year : =108.16+108.16 x s =% 108.16 +% 4,33 =F 112.49 ‘Now, the total compound interest earned in 3 years will be € 112.49-% 100 = 12.49 Let P= the original principal A= Amount at the end of the investment period oe 100 n = number of years of investment (or Conversion Period) ‘Then, the amount at the end of first conversion period =P+Pi=P(+) the amount at the end of 2nd Conversion Period =P(L +i) +P. +) i=P (+i? the amount at the end of 3rd Conversion Period = PCL+i)? + P(L+i)*x i= PUL)? i = the interest rate (in decimal form) i, ++ Amount at the end of the nth conversion = P(1+ i)" Thus, the compound amount of A of a principal at the end of n years compounded annually at the rate of interest is given by A= P(t" -P=PU +i" c. (1) And Compound Interest Note-I. It may be noted that if a principal of P is invested for'n’ years at an annual rate of interest i? and the interest is compounded f times, a year, then the interest rate per annum is “and there are nt Conversion Periods through out the term of the investment. Hence using the formula (1), the compound amount A at the end of n years becomes, - a=p(i+4) t ‘That is, the compound amount A of a principal at the end of n years at an annual interest of i compounded t times a year is given by = A=P (1+ 5 =!) And Compound interest = Amount - Principal or C.I. = A-P,Compound Interey, cues Pao NM WTWifind out the Amount of Sunt at the a annually for TusTRATIONS> per annum compounded Uhre Calculate the amount and the intrest on € 10,000 at 59% Pet years. Given, P= 10000,5= == and n =3 years We have, A= Psi" =10,000(1+0.05)° =10,000(1.05)* Tog A = log 10,000 + 3 log 1.05 = 443x.0212=4.0636 * A= AL 4.0636 =% 11,580 ‘And compound interest = A-P = 11,580-8 10,000 = 1,580 ‘Thus, the amount andthe CL. are 11,580 and 1,580 respectively. [itcostRATIONTO® Find the amount and the interest on & 25,000 at 10% per annum for 5 years compounded () ‘Semiannually and (ii) Quarterly ina year. SOLUTION @ Given, P= 225 1,000, = 20 <9, 1,n=5 years and t= 2 100 We have, a=p(144) t ons? =25,000{1+ 82) [+ compounded semiannual ,000(1.05)"° Log A = log 25,000 + 10 log 1.05 3979+ 10x0.0212=4,6099 A=AL4,6099 =% 40,720 And (40,720-25,000) = 815,720 Gi) Again, when the principal is compounded quarterly ina year, or t= aye 4 A =25,000 (1 + = 25,000(1.025)"und Interest Compo log A = log 25,000 + 20 log 1.025 .3979420x0.0107=4.6119 A=AL 46119 = 40,920 And al -P =F (40,920-25,000) = & 15,920 hen it i% 720, and wl ‘Thus, when the amount is compounded semiannually the sum will be % 40, compounded quarterly in a year the sum will be & 40,920 at the end of 5 years. Il. To find the Principal o¥ Present Value. of a certain amount ILLUSTRATION 11. Find the present value of a sum that amounts to & 2,500 in 7 S years at 4% p.a. compound. SOLUTION We have, A=2,500, n=7 © and i= ~ Yoo ©F 04. The required present value of the sum is given by p=—A___ 2500 2,500 a+” 7 5 Q+.04 2 .04)2 = AL [log 2,500 ~Stog 1.04] = AL 3.3979 — ‘a fund needs to be invested ILLUSTRATION 12, Find in how many years T 10,000. amounts to Z 11,580 at 5% ‘P.a. compound. SOLUTION, We have, P = 10,000, A = 11,580 andi oo % 95. The requited number of years is given by A=P(+ i) orQsiy' sap > nlog (1 +i) =log A—logP roman or n =!A—logP logil+ i) Substituting the respective values in the above we get, n= 19811,580-1010,000 _ 4.0636—4 0.0636 = 836, log( +05) logl.05 0.0212 212 Hence, in 3 Years the sum of 10,000 amounts to Z 11,580 at 5% p.a. compound.00 amounts 10 & 11,580 LLUSTRATION ‘Determine the rate of interest Given, P = 10,000, A = 11,580, and n= 3 years: The rate of interest given by r= i x100 where, iis givenby A =P(1+i)" > (14i" = AP or (1+) VAP ia i=VAP-1 Substituting the respective values in the above we Bet, i = 41158071000 -1 = AL [1/3 (log 11,580 - log 10,000)] - 1 atwhich a sum of € 10 1 = = AL [13 (4.0636 -4)]~ 1 = AL [ (0.0636)] -1 AL 0.0212 - 1 = 1.050-1= 0.05 Thus, r = 0.05 x100=5 Hence, the required rate of interest = 5% p.a. Calculate the C.L. on 9,683 @ 5% p.a for 3 years with half yearly rests. SOLUTION We have, P=%9,683, 1 = 0 0.05, n=3 years and ¢=2 {+ Interest is compounded hal yet] ‘The required C.L. is given by Cl. = A-P 1 where, A=P (44) i Substituting the respective given values in the above we get. A= 9683 (1+0.05/2)"? = 9683( 1 +0.025)¢ = AL [log 9683 + 6 log 1.025] AL [3.9860 + 6 (0.0107)] = AL [3.9860 + 0.0642] = AL 4.0502 = 11,230 Thus, CLL. = 11,230 - 9,683 = 1,547, Hence, the required amount of C.L. = 1,547 approx,Compound Interest ‘VESTS Hite tie eon growth rate of Popelaton i ion at the beginning of Jean pPePalation of Cuttack city increases every year by 2.5% ofits popula stat Year in how many years will he ota incase of population be 30%. [Sono — Given the rate of growth or j= ee oe. 10 ing of a year or P be 100 and so A = 100 + 30 = 130 A=P (i4y" ‘ubstituting the respectively vatues in the above we get, 130 = 100 ( 140.25)" = 100 (1.025)" =130. > (.o2sy" = 130 _, F090 7130 n= 1081.30 1139 Jog 1.025 ~ 0.0107 ~ 107 | = 10 years and 8 months appr Hence, in 10 years and § months the total increase in ‘increase in the population of Cuttack city will be VIL. Depreciation of Asset ae: e ses Depreciation means i © in thy ence. It represents the : fand_ as such represented as expense in the ms, 2, PoFtion use during a particular accounting period. For Process of ¢ ‘ : | For the purpose of calculating the amount of deprecia fer its Particular period a number of methods are used viz. Fixed Instalment Method. Dimise cciation fora hing Balanc, , Working hours “method et But the fixed instalment’ methods ase nee Diminishing balance methods are popularly in used. In fixed instalment method, a fixed percentage of the original cost of the fixed assets minus sera be : D value is written off every year till the end of the estimated life by way of depreciating and which of fixe, quantity. ‘Thus, according to Fixed Instalment Method, Cost of the Fixed Assets-Scrap Estimated Working Life S ‘A. plant was purchased % 10,00,000 on 1-1-2015 and its estimated life is of 10 years a %(10,00,000-2,00,000) = 780,000 10 auc method a fixed percentage is Similarly, in case of Diminishing balance ee a ead rueet ve ep VaME : y i ms ? down value o \ ah eae Ae ae hes Se ee edit adbaly diminished or decreased’ once bit Be ean eae Paces Price of K depreciates at a rate of r% annually Suppose a a rey scrap value after ‘n’ years will be (K-S) =P. Depreciation = Depreciation Charged in each year =Sse ee ere oe Compound Inter Bo ciated value per annum yy Here, P will be treated asthe present value ofthe fixed assets. The depr be Depeiaed vate =P (1-—T\ or A= (Li Original Value = Present value + Serap Or K = A (I-i)* + Serap ILLUSTRATION, 16. . end of the 4" years, ‘A machine depreciated in value each year at 10% of its previous value and atthe Mela Value was ® 1,31,220. Find its original value, SOLUTION Given, Depreciated value =® 1,31,220, roa ned Wehave, P= A (iy =1,31,20 (10.14 or P =1,31,220x(0.9)4 Let x=(0.9)* =1,31,220 x 1.525 4 x=AL-4log 0.9 = 20011050 =AL[-4xT .9542] = AL+44(3.8168) = AL(+4) + 4.1832 = AL 0.1832 = 1.525 Since, there is no scrap value, the original value of the machine is € 200110.50. TS erat A machine costin; a 8 & 50,000 depreciates ata constant rate of 8%. What is the depreciation charge foc Year? Ifthe estimated lite of the machine is 10 years, determine te scarp value, SOLUTION i jee Given, P= 50,000, i= =008 Book value at the end of 7 year =% 50,000 x (1-0.08)"] Book value at the end of 8" year = [50,000 x (1-0.08)'} Depreciation for 8" year= & 50,000 (0.92y' ~% 50,000 (0.92)* 50,000 [ (0.92)'-& 50,000 (0.92)* = %50,000 x(0.92)" (1-0.92) = 50,000 x (0.92)' x 0.08 0,000 x 0.5580 x 0.08 = 2232 (Using logarithm, the value of (0.92)’ = 0.5580) ‘The scrap value or the Depreciated value at the end of 10 year =P(1-i)" = 50,000 (1-0.08) = 50,000 x (0.92)'° =F 21,725. ‘Thus, the depreciation charged for the 8" year is € 2,232 and the scrap value after 10 yess % 21,725. = 50,000 x 0.4345‘Compound Interest ear is 90% of its A TY Sct costing & 20,000 depreciates in such a way that its value at the end ee 7,500. Find the waar eeinnlng of the year. If the TV. ser tn obsolescence is valued at © 7,500. number of years for which the TV set was in ‘use, ‘SOLUTION We have, the cost of the TV set or P = rate of depreciation ori au or .10, % 20,000, the obsotet value at the end or A= 7,500 and the B (+ yearly ending value is 909%) By the formula of uniform, Periodical reduction, we have, A=P(1-)" Substituting the respective values in the above we get, 7,500 = 20,000 (1-0.10)" 7,500 > (1-0.1)" = 2200, 6 oy 3/8 = y= 3 909 2 0-9)" 3/8 = 0.375 > n log 0.9 = log 375 n =1080.375 _ 1.5740 _ ~0.4260 4260 log0.9 19542” 0.0458 ~ ase =9.3 of 9 years and 4 months approx. Hence, the T.V. set was in use for 9 years and ¢ months. ILLUSTRATION 19, A machine, the life of which is estimated to be 20 years costs © 1,00,000. Find its scrap value at the cnd of its life if depreciation is charged at $% pa. on reducing balance soe SOLUTION Obviously, = 1,00,000, n= 20 and i given by the model of uniform periodical reduction. Thus, A=P(-i)" 1,00,000(1-0.05)° = AL [logl,00,000+20 log 0.95) = AL[5+20(1.9777)]= AL{S+1. 5540) = AL 45540 = 35,810. Hence, the required scrap value of the machine = 35,810. x or 0.05. The scrap value at the end of the life of the asset is 1 The difference between the C.1. and the SJ. on a certain sum at 12% pa. in S years = 162. Find the be n th su pa. dif sum. Let the sum of P be 100, we have n =5,r=12ori= —— andCl-S1 3 162. f . .Compound Interesy 12 60 s si = PRUE 100K 100 = 100 (1.129* - 100 ’ = 1,762 Cl. = PCH)" Por C= A-P =100(140.12) 0492 = AL 0.2460 1 Let (1.10 ofa ALG og 112) = ALSO : CA, = (100 1.762) 100 = 100% 0.762.570 Now, the difference between the C.. and 8.1. © 76.2 -€ 60 ‘When difference is 16.20, the sum proposed = 100 100162 = %1,000 ‘When dterence is 162, the sum proposed = x162 Hence the required sum s® 1,000, a : EXERCISE [[)) yund for 3 years. 1. Calculate the amount, and the interest on 8,000 at 10% p.a. Compo Ans. (& 10,648, 2,645 Ans. [% 163) 2 Calculate the ‘compound interest on & 1,875 at 4% p.a. for 2 years. i A ‘i thods on : 3. Find the compound interest by both the i) gradual and (i) algebraic metho % 9648.50 @ 5% p.a. for 3 years, (i) 761,185 @ 6% P.a, for 23 years Gi) 7139.40 @ si% Paa.for3 years, Ans, {() € 1524.46 (i) & 10,633 (ii) & 1188.60) ‘4 Find the present value of the sum that amounts to: ()% 5,324 in 3 years at 10% p.a. compound. Gi) 810,648 in 3 years at 10% p.a. compound, (iil) & 7406 in 3 years at 15% pa compound. Ans. (i) & 4,000 (i) & 8,000 (ii) & 4,800 5. Find in how many years € 2,000 amounts to 2247.20 at 5% P.a. compound. 6. Compound interest ‘on % 4,000 at 10% P.a. is ® 1856.40. Find the time. 7. Determine the rate of interest at which a sum of & 3,200 amounts to % 5529, Ans. [2 years] Ans, [4 years] .60 in 3 years ? Ans. 20%] 8. Find the rate of compound interest at which & 10,000 amounts to & 12882.25 in 2 years Ans, (13.5%) _ L 9. Find the compound interest on % 12,000 for 1 years, at 16% p.a. interest being compounded quarterly. Ans, [& 3183.83] 10. Find the amount of & 6,000 in 2 yeas at 8% pa, interest being ‘compounded half yearly. Ans, [7,025] 11. If, the annual increase inthe population of a state is 25 per thousand and the present number of its inhabitants is 26,24,000, what will be the population m in 3 years hence ? What was it, aye! ago? Ans. [(i) 28,26, 000 (ii) 25,6000)Compound Interest ex 12. 13. 14. 15, 16. 17. 18. 19. 21. Pieces Costing & 5,810 depreciates @ 10% of its value at the beginning of a year. If & Scrap value of € 2,250, find the number of years for which the machine was in us [Ans. 9 Find the difference between the Cc @F5,000 for 4 years at 5% pa, - : ean for 3 years at 6% p.a. compounded half yealy ii) € 1,000 for 2 years at 49% i Pa. payable quarterly, (Ans. (i) &75 (i ii Find the numberof years in which a sum : ime oem (i) doubles itself at 4% p.a. compound, Gi) trebles itself at 5% p.a. compound, (Gi) quadruples itself which doubles in 4 years. On what sum an interest of ‘ompound interest and the Simple interest on Ans, (i) 18 (i) 22.5 (ii) 8) (@F 1123.20 wi : ) 20 willbe charged for 1 ~ years at 12% pa, compound, #) © 437.50 wil l 437.50 will be charged for + year at 10% p.a. compounded quately (iii) & 6243.20 wi 7 willbe charged for 1 year at 8% pa, compounded half yealy. (Ans. () 6071 (ii) 8578, Git) 49946), ‘What rate of interest p.a. does a person get who is paid (© @ 5% p.a. Compounded half yearly. (ii) @ 5% p.a. Compounded quarterly. [Ans. (i) 5.06% (i) 8.24%). ‘What sum will amount to (OT 1,000 in 2 years @ 5% p.a. compounded half yearly. (ii) % 650 at the end of the Ist year and % 676 at the end of the second year. (iii) 28119 in 3 years at 3% p.a. for the first year, at 4% p.a. for the 2nd year and at 5% p.a. for the 3rd year. [Ans, % 905.80, @ 625, & 25,000] Find the compound interest on & 6,950 for 3 years, if interest is payable half yearly @ 6% p.a. for the first two years and @ 9% p.a. for the third year. TAns. & 1592.13] At what rate per cent per annum ( % 600 amounts to & 10,000 in 15 years, interests being compounded half yearly. (ii) Z 1,000 amounts to & 1,331 in 3 years, interest being compounded annually. TAns. (i) 19.6, (ii) 10] ). On what sum the difference between the CI, and the S.I. is ( %8 in 2 years at 4% p.a. (ii) 110.16 in 3 years at 6% p.a. (iti) & 3,888 in 2 years at 9% p.a. {Ans. (i) & 5,000 (ii) & 10,014.55, (ii) & 4,80,00 ‘A person leaves for his 3 sons aged 6, 10 and 12 years % 10,000, 12,000, and & 15,00 respectively invested at 3% p.a, compound and payable on each child attaining his age of | years. Find how much each child gets. [Ans. (i) @ 14,240, (ii) & 15,192, Gi) @ 17,89a CC __——— Compound Interes; ay among his three dau, ould be divides amount when nhs 22 A man tet ® 18,000, with the instruction that it sh ld receive Bed 9, 12 and 15 years in such a way that each a % pa. compound, what should eag, 35% pa aches the age of 25 years, If the rte of interest be 37 tans. £9395 art in 3 years and (Ans. & 881, % 89), their age of 21 years ‘daughter Teceive at her age of 25? the first p 23. Divide © 1,682 into two pats such that at 5% pa. compound Second part in 5 years yield the same amount. hh that at 24. Divide 82602 between two brothers — (Ans. © 1,352.8 1.259 Set equal amount, money being worth 4% p.a. compound. for 2, 3, and 4 %S: Divide & 6,305 into tre parts such tat thei amount 7 Sa ierioe (i200 Tespectively shall be equal, Bee 26. A machine vat Year. Whe; + beginning of ied & 49,074 is to be depreciated at 15% p.a. of its eat aha Binning of each ™ will the value be (i) & 20,000, and (ii) 1/10th of the origin: Ans. (i) 4.25 years ( INTEREST -OMPOUNDED ‘CONTINUOUSLY ‘S invested for 'n’ years at an annual rate of '? and the interest is compounded '? times Year, then the int. make use of formula (1), the compound amount A at the end of n years becomes ase(ist)” ‘rest rate per conversion period is 4 and there are ‘nf Conversing Periods. Thus, if we t \PPENS to the amount as the number of times 'f that the interest is ‘compounded Per year gets larger and I y ‘rger. When interest is so compounded, we say that the interest ‘compounded te NUSTY. Using limit and continuity, the case ot Continuous compounding can be solved easily s us, We have,Compound Interest ERE) ye Now, As tigen] =Pe™ Hence, the compound amount ‘A’ ofa Princiy compounded continuously is given by P’after'n' years at an annual interest rate of ' yAEPS"), where the value of log e = 0.4343, Pu TION 21) A person deposits & 5,000 in a bank which ii : x Pays an interest of 11% per annum compounded Continuously. How much amoune ‘ill bein his account after 10 years ? SOLUTION > Given, P = 5,000, We have, 000xe'0.11 > We obtain, log A = log 5,000 + Ll loge. = 3.6991 Taking log of both sides, = 5,000 x el! ILLUSTRATION 220) A National Savings Certificate Costs © 15,000 and realises % 20,000 after 5 years. Find the rate interest involved when it is added (a) ‘Yearly (b) Continuously, SOLUTION” (@) When interest is added yearly We have, Thus, or = 5,000 x 3.0042 = 15,021 P= 15,000, A = 20,000 and n=5 years, A=P(4i" 20,000 = 15,000(1+i)° 4 aS or a =(1+iy Taking logarithm of both the sides, we get log 4-1og 3 = 5 log (1 +1) or 0.6021 0.4771 = 5 log (1 +i) 0.1250 0.4435 (14i) = AL 0,025 = 1.059 059-1= 0.059 or 5.9% or Jog (1+i) = 025,Em 3 Compound tier, (b) When interest is added continuously We have A=Pe™ = 20,000 = 15,000 x e**' => fae 3 => log 4—log 3 = Siloge => 0,6021-0.4771 = 5ix0.4343 > = 01250 _ 0.0575 or 5.75% 0.4343 x5 ILLUSTRATION 23. If interest is compounded continuously at an annual rate of 9%, how many years would it take for g Principal P to triple ? Give your answer to the nearest year. SOLUTION Suppose it takes n years for a principal P to triple at an annual rate of 9% compounded continuously. Then Behe or 3=e" Taking logarithm both sides, we get log 3 = 0.09 n log e 0.4771 04771 or = = 0.09x loge ~ 0.09x 0.4343 1~7! oF 12 years approx. ‘Thus, it will take 12 years to triple the principal if it is compounded continuously. ILLUSTRATION 24, If interest is compounded continuously, at what annual rate will a principal of P double in 10 years. SOLUTION. Let i be the annual rate of interest compounded continuously, then 2P= P el% or e=2 or 107 loge =log 2 => — 10x0.4343xi = 0.3010 0.3010 ~ 100.4343 NOMINAL AND EFFECTIVE RATES OF INTEREST \ as ‘The annual rate of interest that is stated in each transaction is called Nominal rate of interest. Thus, if 7 an investment is made at 8% converted semiannually, the nominal rate of this investment is 8%. But the actual interest earned on the given investment will be more than 8% in that year. For example, & 100 has = 0.069 or 6.9% 2 .08) been invested at 8% converted semiannually and at the end of the year it will be A = 100 (1 +2 ) oCompound Interest A = 100 (1.04)? =F 108.16. Thus, the interest actuall iis princi a ly earned on this princi of F 100 i i Cana, tn Annual return of 8:16%, We say that the effective-rite in tis cass is a6 Scenes Savosenion Period is a year, the effective rate is same as the stated annual sac Annual yield from investment or saving are associated with effective rate ive rate is investment oF saving and also the effective rate is the actual rate Relationship Between the Effective Rate and the Nominal Rate Let 'E' denote the effective rate corresponding nominal rate ' converted 't' times a year. Since an effective rate is the actual rate compounded annually, therefore at " ; Sin amounts in one year to PCI +E), ly, therefore at the effective rate 'E', the principal 'P’ Thus P(I+E) =P (1+ 4 i ‘lyear) i or It e=(1+4) i x or E -(1 +) -1 i 7 Hence Effective Rate, |) =(1+4) a4 (4) By using the formula (4), as above we can find out the effective rate equivalent to the nominal rate i converted 's' times a year, that is equivalent to the pper conversion period. However, if the nomianal rate i is compounded continuously the effective rate (E) is given by e-anl(+)) | win (1+ )-1 = lim (+4) -1 tom Oe i 1 = tim (1+)! -1 pets Let 4 =x, then as 102, we have x—> 0 thus t 7 E= [yma] ie Hence, in case of nominal rate i compounded continuously, we have that | Effective Rate (E) =e'-1oe Bo Compound Interest FORCE OF i INTEREST. The nominal rate ‘i’ compounded continuously and equivalent to a give Cffective rate E is called the force of interest. mn a = ON S55) Find the effective rate corresponding to 12% p.a. convertible quarterly. TSoLuTIon We have, 4 2 or 0.12, and r = 4 (since quarterly) Let P= 100andn = 1 year. ‘The amount of an investment is given by A=P(1+i/)”™ Substituting the respective values in the above we get, 14 7 0.2) A=100 (422) = 100 (1.03)* = AL [log 100 + 4 log 1.03] AL [2 +4 (0.0128)] = AL [2 + 0.0512] L 2.0512 = 112.6 -P = 112.6 - 100 = 12.6 Thus, on & 100 interest in 1 year is effected at = 12.6. Hence, the effective rate of interest = 12.6% p.a. ILLUSTRATION 26. Wehave, C1. What effective rate is equivalent to nominal rate of 8% converted quarterly ? SOLUTION Let x= (1.02)* We have p-(1+4) 1 orx=AL 4log1.02 : = AL 4x 0.0086 = AL 0.0344 =1.082 = (1.02) = 1.082-1 = 0.082 or 8.2% Thus, the effective rate is 8.24%. This means that the rate 8.24% compounded annually yields the same interest as the nominal rate 8% compounded quarterly. [AIELOSTRATION 27.” Find the effective rate equivalent to the nominal rate 9.6% converted (a) monthly (b) continuously.Compound Interest 5.19 | seraEN | (@) We have i= 0.096 and += 12. Thus the equivalent effective rate (B) is given by Let x = (1.008)! | e= (144) 4 orx = AL (12x log 1.008) p = AL 120.0034 = AL 0.0408 = 1.098 =(14 2026)", 12 = (1.008)"?— 098 or 9.8% (b) The effective rate equivalent to the nominal rate 9.6% converted continuously is given by Let x= 696 0056 or log x=0.096loge or x= AL 0.096 x 0.4343 = AL 0.04169 = 1.0992 0.0992 or 9.92% ILLUSTRATION 28. Find the force of interest corresponding to the effective rate 8% ? SOLUTION Given E = 0.08 We have, E e1 [As nominal rate’ is compounded Continuously, here Eis the force of interest] . 0.08 = e-1 > +0.08=1.08, > ilog e = logl.08 log 1.08 _ 0.0334 : is =0.0769 = loge ~ 0.4343 Thus, the force of interest is 7.69%. This means that 7.69% compounded continuously and 8% effective are equivalent rates. ILLUSTRATION 29; A money-lender charges ‘interest’ at the rate of 5 paise per rupee per month, payable in advance. What effective rate of interest does he charge per annum ? SOLUTION Since the money lender charges interest at the rate of 5 paise per rupee per month, payable in advance, therefore 5 paise may be treated as interest on 95 paise for one month. Consequently interest rate per month ===. Thus, the equivalent effective rate (E) per annum is given byE 95 19os Compound Interes, log (1 +B) = 12 (log 20-Iog 19) > log(1+E) = 12(1.3010-1.2788) = 12 x 0.0222 = 0.2664 14E = AL 0.2664 = 1.847 or Effective rate (E) = 1.847-1= 0.847 = 84.7% PRESENT VALUE OR DISCOUNTING CONCEPT Present value or Discounting Concept is just the opposite of the compounding concept which we have also discussed in the chapter Annuities. According to time value of money covcept, the sum of money received today is less valuable than tomorrow or a rupee received today is more valuable than the rupee received tomorrow. Suppose, a deposit of € 1,00,000 will give a matured value of & 1,10,000 One year (rate of interest being 10% p.a.). It indicates that % 1,00,000 is the present value of @ 1,10,000 which shall be received after one year. Similarly, Discounting Concept estimate the present value of a future payment or series of payments which is to be adjusted against time value of money. The present value of a rupee which will be received in future will be less value of a rupee received today. Under compounding concept we convert present sum into future sum, but in Discounting concept we Convert future sums into present sums. The present value of future rupees will always be lower due interest factor. That is why the process of finding the present value is called Discounting and the val calculated for the earlier date is called the Discounted value. According to compound interest formula, we have, A=P(1+i)" = Peay or +7 Here, ‘P’ the present value or the discounted value of an amount “A’ due ‘n’ years hence, and tt annual rate of interest per rupee is ‘’. If the interest is compounded semi-annually then n will imply the no. of six month periods betwee! the time of cash flow and the time of receiving the return and ‘i’ will imply the semi annual rate of inter on unit sum i.e. per rupee. If for example, the annual rate of interest is 10% i.e. 0.1 then the semi an rate of interest will be 0.1/2 = 0.05. Similar method will be adopted in case of quarterly and mont) compounding. Otherwise one can use logarithm to find the discounted value in the formula,Poa (+i" oa t T period . The vah ‘al inthe present value table stated athe ot Thus, the present value of ‘a’ continuously is given by, PrAew [ECOSTRATION o> inted v; semi-annually. alue Of € 10,000 due after § Years if the rate of interest is 10% compounded I SOLUTION 7 We have, P= a(t Given, A =F 10,000, i= =0.1andn=5 Thus, P= 10,000 or 10,000 (1.05)"° log 10,000 - 10 log 1.05 +0000 — 10 x 0.0212 .0000 ~ 0.2120 = 3.7880 nti log 3.7880 = 6138.00 ‘Thus, the discounted value of & 10,000 due 5 years hence & 6138.00, ILLUSTRATION 31 Mr. X invests money in a bank paying 8% interest cor is the discounted value of the investment ? mpounded to receive Z 80,000, in 8 years. What SOLUTION Given, A = 80,000, = 5 = 0.08, n= 8 years am We have, P= (ie!) ce P = 80,000 (1 +Compound Interest 10,000 (1.04)""° Jog P = log 80,000 - 16 log 1.04 =4,9031 -16 x 0.0170 4.9031-0.2720 = 4.6311 P= Anti log 4.6311 = 42770 Thus, the discounted value of ® 80,000 in 8 years is € 42:70. | ILLUSTRATION 32, How much should be invested at 6% per annum so that after 4 y4ears the amount will be & 25,000 when interest is compounded : (a) Annually (b) Quarterly (c) Monthly (4) Continuously . SOLUTION Given, A=%25,000, 6 0:06 and n=4 years. 100 =n (@)Wehave — P =a(i+4) et or P=25,000} (1 + 208) or P= 25,000 (1.06) og P = log 2,500 ~4 log 1.06 = 3.3979 — (4x 0.0253) 3979 0.1012 = 3.2967 P = Anti log 3.2967 = 19,800 Thus, & 19,800 should be invested to get set& 25,000 after 4 years compounded annually. (b)Wehave, P= ali +) ‘ ned Thus, P =25000(1 + 206) or P = 25,000 (1.015) log 25,000 - 16 log 1.015 3979 — (16 x 0.0064) 3979 — 0.1024 = 4.2955 o P= Antilog 4.2955 = 19,740 Thus, & 19,740 should be invested to get ® 25,000 after 4 years compound quarterly. acm (©) Wehave, = P= (ie!)—txa2 Thus, P =25,000(1+ 226) 12 or P = 25,000 (1.005)* log P = 2 log 25,000 — 48 log 1.005 4.3979 — 48 x 0.0021 Jog P = 4.3979 -0.1008 = 4.2971 P = Anti log 4.2971 = 19,820 Thus, = 19,820 should be invested to get & 25,000 after 4 years compounded quarterly. (a) When, the interest is compounded continuously P=Ae™ = 25,000 x &*° = 25,000 xe = 25,000 x0.78663 (Table Value of e°”* = 0.78663) = 19665.7 Thus, & 19665.70 should be invested to get € 25,000 after 4 years compounded continuously. | ILLUSTRATION 33. Mr. Khanna left % 5,00,000 to be divided between his two daughters Rakhi and Sakhi. Rakhi’s share ‘was to amount to a certain sum of money at the end of 5 years and Sakhi’s share was amount to an equal amount at the end of 7 years. If the rate of interest is 6% compounded annually, find the amount. SOLUTION Given, the Discounted value of R's shares + S's share = © 5,00,000 and i o 0.06. Let the Matured value of the share is A and according to the proposition the amount is equal in both the cases. Thus, the discounted value of Rakhi's amount = A (1+0.06)* ‘The discounted value of Sakhi’s amount = A (1+0.06)7 Thus, A (1+0.06)* + A (1+ 0.06)” = 5,00,000 ‘ => A [(1.06)° + (1.06)7] = 5,00,000 Let x =(1.06)* Let 1.06)" x =AL[-5 log 1.06] y =AL [-7 log 1.06] AL -5 x 0.0253 AL ~7 x 0.0253 = AL- 0.1265 AL-0.1571 ALT 8745 AL T. 8429 0.7491 = 0.6965 Thus A (0.7491 + 0.6965) = 5,00,000 => — A(1.3456) = 5,00,000 _ 5,00,000 ~ 1.3456 ‘Thus, Rakhi and Sakhi will get € 371581.45 each after 5 years and 7 years respectively. = = 37158145Compound Interes, EE COMPOUND AMOUNT AT CHANGING/RATES (())/’ So far we have discussed a constant rate of interest for the entire duration of an investment, Sometimes, interest rate may change from time to time. For example a bank which pays interest at 86 when a deposit is made may after a number of years raise the rate to 9% and later on may reduce it to 7% ‘Thus, the final compound amount is the product of the original principal and two or more factors of the form (1+i)" or e" depending on the changing value of rate of interet and the time of investment. Symbolically, Amount = P (4a) (1+ * le (+ 8)” : 100. 100, 100; or A=P (I+ i) (1+ i) (14 is) The compound amount A of a principal ‘P’ at the end of m years at an annual interest of + compounded ¢ times a year is given by moa ye (gyms (6 ca is Aart) Ue) Ure h ILLUSTRATION 34. Find the compound interest on & 2,600 in 3 years, the rate of interest being 4% for the first year, 5% for the 2" year and 6% for the third year. SOLUTION Given, P =% 2,600 n =3 (m = 1, m= 1,3 =1), and y= 004 5 6 > 0.05, =-£-= 0.06 100 ° 100 We have, P(L+i1) (1+i2) (1+is) 2,600 (1.04) (1.05) (1.06) =%3009.552 Thus, Compound Interest = A-P =F (3009.552~2,600) = ¥ 409.55 ILLUSTRATION 35. A made a deposit of & 25,000 in a savings account. The deposit was left to accumulate at 8% compounded quarterly for first five years and at 10% compounded semiannually for the next 3 years. Find the compound amount at the end of 8 years. SOLUTION For the Ist 5 years, i; = 0.08, t = 4, m = 5 and for the next 3 years, i, = 0.10, f = 2, m= 3. amount at the end of 8 years is : a ee a=p(1+4) {1+4) . t t 5x4 3x2 0.10 =25,000(1+ 208) (682 ) =F [25,000(1.02)” x (1.05) 5] =AL [log 25,000+20 log 1.02+6 log 1.05] = AL[4.3979+(20x0.0086)+(6x0.0212)]Compound Interest = AL(4.3979+0.1720+40.1272) : = AL 4.6971 = 2 49,780 Thus, the depositor will receive % 49,780 after 8 years. [ILLUSTRATION 36. Mr. Raj de ited — Gu posed eee x 3 years offering interest at the rate of 6% compounded half j i compounded in [" SOLUTION Required balance after 3 years will be 2 A= 1,00,000(1+ 298) {i+ 0.12 2 4 = 1,00,000 (1.03)°(1.03)*,e"" = 1,00,000(1.03) °.e°1°= %1,31,966.40 = REVIEW EXERCISES = [ll objective Type Questions 1. Answer the following questions in one or two sentences each. (i) What is simple interest ? (ii) What is compound interest ? (iii) What is interest period ? (iv) What is interest 7 (vy) What is the formula for the calcul (vi) What is effective rate of interest ? (vii) What is the formula for calculating interest are given ? What is the formula for What is the interest of £5,500 for 5 years at 11% pa. ? sulating simple interest ? Jation of amount if interest is compounded monthly ? time period when principal, simple interest and rate of (viii) finding the amount when interest is compounded quarterly ? (ix) (x) What is the formula for calc (xi) What is nominal rate of interest ? ¢ What is effective rate of interest 4n : a ; (: ) ix) 3,025 | yan 00 (Wi) A=P (5) (i) T=S.LX p> (wil) A= P 2. Correct the following if wrong or else write True. (a) 20% of 60 > 60% of 20.(b) 20% of 40 > 40% of 20, (©) 10% of 40 > 30% of 20, () 10% of 360 > 5% of 720, | ©) 15% of 60 < 20% of 50, (£) When interest is cor different, (g) SL>CL. () A=P(L4i" i) Effective rate of interest > Nominal rate of interest. Compound Interes, pounded annually the simple and compound interest for first year ay Answers O< @ ) ®< (a) A=PU +9" @ (©) True (i) True 1. | Very Shor: Type Questions : Le : 1, To what amount will 10,000 accumulate in 6 years if invested at 8% compounded quarterly ? 2. If 1,000 is invested at an annual rate of 9% compounded continuously, find the amount at the end of 6 years. 3. If & 2,000 is deposited in a savings bank account earns interest at an annual rate of 6% compounded continuously, what is the value of the account at the end of 3 years ? 4. A person deposits € 40,000 in a bank which pays an interest of 5% per annum compounded continuously. How much amount will be in his account after 4 years ? 5. How long will it take for € 50,000 to amount to % 70,000 if it is invested at 8% compounded quarterly ? 6. What annual rate compounded continuously is equivalent to an effective rate of 5% ? 7. Find the force of interest corresponding to the effective rate 6%. 8. What yields more interest : 7.8% compounded semiannually or 8% effective ? 9. What is better from the stand point of the investor : 6.2% compounded semiannually or 6% 1716 2394.40 5.42 yrs. 6.4.88% 7, 5.82% 8. Second : 9. Ist BTIE) tong Type Questions i i i nded annually. A co! in bank offers an interest rate of 6% per annum compounded ‘ : Er asin its interest continuously. What rate should the competing bank offer sh! i ual ? i of interest for the two banks are equal ? aeecrn deposits & 10,000 in a bank which pays an interest of 8 per mum campos a aersously How much amount wil be accumulated inisazsount afer Sear 4, A National Savings certificate costs © 15 and realizes + raterest involved when itis added | (a) yearly (b) Continuously rnCompound Interest 4, s 10. 1. 2 13. 14. 15, 16. 17. 18. 19. (i) Double and (ii) Tripte itself in 8 years A person deposited 1,000 in a bank at 5% in Find the force of interest Sorresponding to the effective rate (i) 6% (ii) 5%, Find the present value of € 500 due 10 years hence when interest of 10% i A trust fund is being set- is is compounded. of years the machine was used, & machine costing € 50,000 depreciates at a constant rate of 89%. What is the depreciation charge for the 8" year. Ifthe estimated useful life of the machine is 10 ‘years, determine its scrap value ? A machine depreciates at the rate of 10% per anqum for the first (wo years and then 7% per aonum for the next 3 years, depreciation being calculated on the diministing value. If the cane, of the machine be & 10,000 initially, find the average rate of depreciation and the depreciated value of the machine after five years, Find the discounted value of ® 4,000 due after 6 years if interest rate is 7% compounded semi- annually. A Person invests money in a bank paying 6% interest compounded semi-annually. If the person expects to receive & 8,000 in 6%, what isthe discounted value ofthe investment. Find the present value of % 50,000 due 10 years hence when interest of 10% is compounded (@) half yearly (b) continuously. 88% 4, 8.66%, 13.73% 1.5.8; 2.% 14910 3.292%, 2: L 5. z oe 88 6. 7 13194.17 7. 6.13%, 8.16% 8. Second investment 9. 5: 2825%, 4.88% 10. 2? 11.2 18394 12, 9.31 years 13.2 2,00,000 14.9 years 15,%21719.42 16.8 6551.28 Te 2.710 18, % 5,742 19. % 18,870, & 18,394. Compound Interes, TY QUESTIONS est on 710,000 at 5% per annum compounded annually for : (3 Marks) (UU-2022) 10% baa. is 1856.40, Find the time, Marks) (UU-2022) sum doubles itself at 4% p.a. compound. (7 Marks) (UU-2022) “% Pa. so that after 4 years the amount will be 825,000, When rly (ii) Half yearly. (7 Marks) (BU-2022) m, "Pound interest and simple interest on a certain sum of money in tw. (7 Marks) (SU-2022) 6 The cost price of a machine is 40,000 whose economic life is 10 years. If the rate of depreciation is 20% p.a. on WDV method find its scrap value after three years. (7 Marks) (SU-2022) 7. Find the amount and the interest of 815,000 ©8% pa. for 5 years compounded semi annually. , (3 Marks) (FMU-2022) 8. Find the effective rate equivalent to the nominal rate . @ 6% converted quarterly. (ii) 8% converted semi annually. (7 Marks) (FMU-2022) 9. At what rate the amount is 2 years becomes s of the principal? (3 Marks) (FMU-2022) 10. A man deposited €12,615 in a bank in such a way that each of his two sons gets the same 15 yong aig: ey attain the age of 21 years. Now, the elder son is 17 years old cad younger is 15 years old. If rate of interest be 5% p.a. CLL, find the sume deposited in the account of each son. (7 Marks) (RDU-2022) 11. Mr. Anurag deposits € 4,000 in a finance company for 1¥4 years at 10% per annum. If the interest is compounded half yearly, calculate the amount he will seseive at the end. (3 Marks) (RDU-2022) 12. (i) Mr. Subham deposited %4,000 in a finance company for 144 years atl0% per annum. Find the amount received of the interest is compounded half yearly, Gi) Find the compound interest on the sum of 87865 for 8 years at 3/5% pa. (3 Marks each) (NOU 2022) 13. ‘The difference between Simple Interest and Compound Interest on a suum of money for 2 years is & 15. The simple interest on the same sum for 4 years is € 1,200. Find the one, and rate of interest. (7 Marks) Rayagada Auto-2022) charged with each installment. (7 Marks) (KU-2022) 15. (Determine the principal that will earn 226,250 as S.1. in 7 years at 5% pa. also find the amount after 7 years. Gi) Compound interest on %4000 at 10% p.a. is $1856.40. Find time. (3 Marks) (BJB-2022) 16. Find the difference between C.I. and S.I. on certain sum of money at 12% p.a, in 5 years is 2162. Find the sum. (7 Marks) (as-2022) ! i inded annually for 17. Cae the amount and the interest on 10,000 at 5% per annum compou rasan ooo