Dear Mockbankers
Today in Banker’s Bounty, you will get Simple/Compound Interest concepts and questions from previous year’s papers.
Step 1: Watch the video prepared by MockBank’s expert.
Step 2: Read the basic concepts that follow.
Step 3: Put a timer before you solve the previous year questions on decimal and fraction in quiz and record how much time it takes you to solve it.
Step 4: Send us questions in comments section below which took maximum time and we will tell you a faster way to solve it.
Basic Concepts
The cost of borrowing money is defined as Simple Interest. It is of two types – simple interest or compound interest. Simple interest(SI) is calculated only on the principal (P) whereas Compound interest(CI) is calculated on the principal and also on the accumulated interest of previous periods i.e. “interest on interest.” This compounding effect makes a big difference in the amount of interest payable on the principal.
Simple interest:
Simple Interest = Principal x Interest Rate x Term of the loan(Time of Loan)
SI = P x i x n/100 when interest rate is taken in percent.
Compound Interest:
CI = P [(1 + i)n – 1]
where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding periods.
Compounding periods : When calculating compound interest, the number of compounding periods makes a significant difference. The basic rule is that the higher the number of compounding periods, the greater the amount of compound interest. So for every INR 100 principal over a certain period of time, the amount of interest accrued at 10% annually will be lower than interest accrued at 5% semi-annually, which will in turn be lower than interest accrued at 2.5% quarterly.
In the formula for calculating compound interest, the variables “i” and “n” have to be adjusted if the number of compounding periods is more than once a year. That is, “i” has to be divided by the number of compounding periods per year, and “n” has to be multiplied by the number of compounding periods. Therefore, for a 10-year loan at 10%, where interest is compounded semi-annually (number of compounding periods = 2), i = 5% (i.e. 10% / 2) and n = 20 (i.e.10 x 2).
The following table demonstrates the difference that the number of compounding periods can make over time for a INR 10,000 loan taken for a 10-year period.
Shortcut Trick: Rule of 72
The Rule of 72 calculates the approximate time over which an investment will double at a given rate of return or interest “i”, and is given by (72 / i). It can only be used for annual compounding.
For example, an investment that has a 6% annual rate of return will double in 12 years.
An investment with an 9% rate of return will double in 8 years.
