Easy Way to Learn Simple And Compound Interest Formulas

Simple And Compound Interest formulas are an important topic to be covered in competitive exams preparation be it for IBPS Clerk, PO, RRB, SO, or SBI Clerk or PO. The number of questions and the complexity of questions vary from exam to exam every year.

Simple And Compound Interest formulas questions are complex in nature and require an understanding of Numbers Systems, Squares and Square roots, Cubes and Cube roots, Percentage Calculation, and Math Tables. Example questions on Simple And Compound Interests formulas and Practice questions on Simple And Compound Interests formulas are given in this article.

Nowadays, Simple And Compound Interest Formulas questions in exams are mixed with multiple concepts and it requires practice and a deep understanding of basic concepts along with quickly identifying numbers.

Simple Interest

Simple Interest is one of the ways to calculate Interest on the Amount paid or given on a loan. Simple Interest is the product of Interest Rate, Loan Tenure, and Principle Amount. This way of calculating interest is in a simple form, hence it’s called Simple Interest.

The Formula of Simple Interest

Below is the formula of Simple Interest:

Simple Interest = Amount x Rate of Interest x Loan Tenure

The amount is the Principal Amount of the Loan.
The rate of Interest is the Interest fixed on Loan Amount and Tenure.
Loan Tenure is the Time for which a Loan is granted.

The Formula for Final Amount through Simple Interest

The above formula of Simple Interest is only used to calculate Interest amounts for the Loan Tenure. But to calculate the Final Amount of Simple Interest below formula is used:

Final Amount = Principal Amount x (1 + Rate of Interest x Loan Tenure)
Or
Final Amount = Principal Amount + Simple Interest

Example of Simple Interest

Example 1: If an amount of 10,000/- is given on a Loan at a Rate of Interest of 12% and for 3 years tenure. Find the final amount?

Solution 1(a): Let’s first calculate Simple Interest by substituting values in Simple Interest formula:
Amount = 10,000/-
Rate of Interest = 12% or 12/100 or 0.12
Loan Tenure = 3 Years
=> Simple Interest = (10000 x 0.12 x 3)
=> Simple Interest = 3,600
=> Final Amount = Amount + Simple Interest
=> Final Amount = 10,000 + 3,600
=>Final Amount = 13,600/-

Solution 1(b): Let’s first calculate Simple Interest by substituting values in Final Amount formula:
Amount = 10,000/-
Rate of Interest = 12% or 12/100 or 0.12
Loan Tenure = 3 Years
=> Final Amount = Amount x (1 + Rate of Interest x Loan Tenure)
=> Final Amount = 10,000 x (1 + 0.12 x 3)
=> Final Amount = 10,000 x (1 + 0.36)
=> Final Amount = 10,000 x 1.36
=> Final Amount = 13,600

Compound Interest

Compound Interest is another way to calculate Interest on the Amount paid or given on a loan. In Compound Interest the Interest Amount of the previous year is added to Principle Amount and this is how every year’s Principle amount grows. This way of calculating interest is used in today’s world where Interest is added to the Principle while recalculation.

How to Calculate Compound Interest?

Compound interest is calculated by multiplying the initial loan or principal amount by one plus the annual interest rate raised to the power number of compound periods minus one. Below is the Formula of Compound Interest:

The Formula of Compound Interest

P_n = P (1 + r / n)^nt

As per the above formula:
P_n is the new Principal Amount.
P is the original principal amount.
r is the Rate of Interest.
n is the Frequency of Compounding.
t is the tenure of the loan.

Example of Compound Interest

Example 1:Suppose a principal amount of Rs. 1,500 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Then what will be the balance after 6 years?

Solution 1: Substituting values in above formula as:
P = 1,500; r = 4.3% or 0.043; t = 6 years; n = 4 {compounded quarterly.}
Putting above values in the formula we’ll get:
=> P_n = 1500 (1 + 0.043 / 4)^{4 x 6}
=> P_n = 1500 (1.01075)²⁴
=> P_n = 1500 x 1.29255
=> P_n = 1938.825
Interest earned in 6 years is = 1938.825 – 1500 = 438.825.

Simple and Compound Interest Formulas

Difference between Simple and Compound Interest Formulas

Relation between Simple and Compound Interest Formulas

There’s a relation between Simple and Compound Interest. We can easily calculate Compound Interest with the help of Simple Interest. Provided Compound Interest is getting calculated for Yearly Compounding. Below is the relation between Simple and Compound Interest Formulas:

Compound Interest = Simple Interest x Tenure + Difference

The difference is calculated as (Rate of Interest)^tenure / 100

Example 3: Calculate the Compound Interest on an Amount of 3000/- at a rate of interest of 5% for two-year tenure?

Solution 3: Let’s calculate the difference as below:
=> Difference = (5)² / 100 = 25 / 100 = 0.25
Now we’ll calculate compound interest as:
=> Compound Interest = 5 x 2 + 0.25
=> Compound Interest = 10.25%
=> Amount of Compound Interest after 2 Years: 10.25% of 3000/-
=> 307.5
=> Final Amount = 3000 + 307.5 = 3307.5

Practice Questions on Simple and Compound Interest Formulas

Below are the practice questions on Simple and Compound Interest Formulas:

1. Calculate simple interest for Amount 10000/- for the tenure of 6 Years at a rate of interest of 6%?
2. Find the final amount to be repaid if X has taken a loan from Y at a 7% Rate of Interest for 5 Years of Amount 20000/-?
3. Find the final amount to be repaid if X has taken a loan from Y at a 7% Rate of Interest for 5 Years of Amount of 20000/- and after 3 Years did top-up of 20000/- again?
4. An amount will get doubled in 10 Years through Simple Interest. Find the rate of Interest?
5. A Fixed deposit was created for amount 10000/- at a rate of interest at 5% for 5 years. Find the maturity amount if rate of interest is compounded quarterly?
6. A Fixed deposit was created for the amount of 10000/- at a rate of interest of 5% for 5 years. Find the maturity amount if rate of interest is compounded half yearly?
7. What difference between the final amount of simple and compound interest if the rate of interest is 6% and tenure is of 2 years for the amount 10000/-?
8. An Fixed deposit is created for two years with top-up on second year with same amount of 10000/- at rate of interest of 7%. What will be the final amount?
9. What will be difference between Rate of interest on two years deposit at 10%?
10. A fixed deposit of 50000/- was created for 5 years at a rate of interest of 7%. What will be the total amount yield of this Fixed Deposit?

Final Words

Practicing the above questions for Simple and Compound Interest formulas is not the end of your practice, but it’s a start of a new journey to apply logic to Simple and Compound Interest formulas with multiple approaches in a right and faster way.

For cracking competitive exams one must practice Simple and Compound Interest formulas and questions without a calculator are a must. At last, during the exam, if a solution for a Simple and Compound Interest formulas question cannot be found easily then mark that question to revisit and move ahead instead of wasting time and energy.