Chapter Based Questions: Why Save ? | Introduction to Financial Markets for Class 9 PDF Download

Q.1. Choose the correct answer.

(i) Mr.Raja has invested Rs. 7,000 in a bank that offers him 7 % compound (yearly) rate of interest. What would be his expected return after 3 years?
(a) Rs. 8470
(b) Rs. 8575
(c) Rs. 7490 

Correct Answer is Option (b)

(ii) As per “ Rule of 72” how many years will your money take to double if compounded at the rate of 6%?
(a) 8 years
(b) 10 years
(c) 12 years 

Correct Answer is Option (c)

(iii) The amount of money that an investor will need to reach his investment goal is based on which of the following?
(a) Principal amount only
(b) Interest only
(c) Principal amount and interest

Correct Answer is Option (c)

(iv) Compounding is
(a) interest on principal and interest earned already
(b) principal amount and interest on principal
(c) Principal amount only

Correct Answer is Option (a)

Q.2. Fill in the blanks.

(i) Savings can be termed as _________ income minus consumption spending.
(ii) Generally there are two types of interest which we can earn namely__________ and____________.
(iii) An amount of Rs. 1,00,000 which compounds at the rate of 10% per year will become ______ after 2 years.
(iv) 4. As per Rule of 72, when a yearly compounded investment of Rs.500 becomes Rs.1000 in 6 years, the rate o f return is _____ %.

(i) Disposable Income
(ii) Simple and Compound
(iii) 121000
(iv) 12%

Q.3. Match the following.

(i) Rule of 72 - Interest on principal only
(ii) Simple interest - Doubling period
(iii) Compound interest - Savings before spending
(iv) Pay yourself first - Savings after consumptions
(v) Disposable income - Interest on principal & interest earned already

(i) Rule of 72 - Doubling Period
(ii) Simple interest - Interest on Principal only
(iii) Compound interest - Interest on Principal and Interest earned already
(iv) Pay yourself first - Savings before spending
(v) Disposable income - Savings after consumptions

Q.4. True or False.

(i) Paying yourself first” means saving after spending.
(ii) The amount of interest earnings depend on the interest rate, the amount of money borrowed (principal) and not the length of time that the money is deposited.
(iii) In simple interest calculation, interest is calculated on the interest accrued during the term of deposit.
(iv) Compound interest will give more earnings for the depositors than the simple interest.
(v) The Rule of 72 tells you how fast you can double your money.

(i) False
(ii) False
(iii) False
(iv) True
(v) True

Q.5. Answer the following briefly

Ans: To calculate simple interest, use the formula:

$Interest$Interest = Principal × (Rate of interest / 100) × Time (in years)

For example, if Rs. 100 was deposited for 1 year at a 10% interest rate per year, the interest would be:

$Interest$Interest = 100 × (10 / 100 ) × 1 = 𝑅𝑠. 10

So, the total amount after one year would be Rs. 100 (principal) + Rs. 10 ( interest ) = Rs. 110.

2. How will you calculate compound interest?

Ans: Compound interest is calculated on the original principal and on the accumulated past interest. The formula for compound interest for one year is:

$Interest$Interest = Principal × (1 + Rate of interest / 100 ) ^Time − Principal

For example, if Rs. 100 was deposited at a 10% interest rate per year, the interest for the first year would be Rs. 10 (same as simple interest). For the second year, the interest would be calculated on Rs. 110 (the sum of the principal and the first year's interest):

$Interest$Interest = 110 × ( 10 / 100 ) = 𝑅𝑠. 11

So, after two years, the total interest would be Rs. 21 (Rs. 10 for the first year and Rs. 11 for the second year), and the total amount would be Rs. 121.

Q.6. Answer in detail

There are two main types of interest calculated for investments: Simple Interest and Compound Interest.

Simple Interest:

• Simple interest is calculated only on the principal amount (the initial sum of money) that was originally invested or borrowed.

• The formula for calculating simple interest is:

  $InterestTime (in years)$Interest = Principal × ( Rate of interest / 100 ) × Time (in years)

• For example, if Rs. 100 was deposited for 1 year at a 10% interest rate per year, the interest would be:

  $Interest$Interest  = 100 × ( 10 / 100 ) × 1 = 𝑅𝑠. 10

• Simple interest is paid at the end of each period (e.g., annually) and does not change over time as it is based solely on the initial principal amount.

Compound Interest:

• Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods.

• The formula for compound interest for one year is:

  $AmountTime$Amount = Principal × (1+ Rate of interest / 100 )^Time

To find the interest:

           Interest = Amount − Principal

• For example, if Rs. 100 was deposited at a 10% interest rate per year, the interest for the first year would be Rs. 10 (same as simple interest). For the second year, the interest would be calculated on Rs. 110 (the sum of the principal and the first year's interest):

  $Interest$Interest =110 × (10 / 100)=𝑅𝑠. 11

• So, after two years, the total interest would be Rs. 21 (Rs. 10 for the first year and Rs. 11 for the second year), and the total amount would be Rs. 121.

Compound interest allows savings or investments to grow faster than simple interest because it takes into account the interest that accumulates over time.

2. Explain the term doubling period with an illustration.

The term doubling period refers to the time it takes for an investment or savings to double in value at a fixed annual rate of interest. This can be estimated using the Rule of 72.

Rule of 72:

• The Rule of 72 is a simplified formula that estimates the number of years required to double the invested money at a given annual rate of interest.

• The formula is:

  Doubling Period (in years)=72 / Rate of interest

• Using the Rule of 72, the doubling period is calculated as:
• Doubling Period = 72 / 8 = 9 years
• This means that if you invest Rs. 100 at an annual interest rate of 8%, it will take approximately 9 years for the investment to grow to Rs. 200.

Example Calculation:

1. Initial Savings: Rs. 100
2. Annual Compound Interest Rate: 8%

• Interest earned = Rs. 100 * 8% = Rs. 8
• Total amount after 1 year = Rs. 100 + Rs. 8 = Rs. 108

• Interest earned = Rs. 108 * 8% = Rs. 8.64
• Total amount after 2 years = Rs. 108 + Rs. 8.64 = Rs. 116.64

Repeating this process for each subsequent year, we can observe that the amount continues to grow. By the end of the 9th year, the total amount would have approximately doubled to Rs. 200.

This concept helps investors understand how long their investment will take to grow and helps in making financial decisions. The Rule of 72 is a useful tool for quick mental calculations without needing to use complex compound interest formulas.