PPT: Compound & Simple Interest | CSAT Preparation - UPSC PDF Download

 Page 1


Compound 
Interest and 
Simple Interests
Page 2


Compound 
Interest and 
Simple Interests
Understanding Interest Rates
What is Interest?
Interest is the fee charged 
by lenders on borrowed 
principal. It represents the 
cost of borrowing money, 
with the percentage charged 
referred to as the interest 
rate.
Factors Affecting Rates
Interest rates are 
determined by inflation 
(changing value of money 
over time) and borrower 
credibility. Higher default 
risk typically leads to higher 
interest rates.
Economic Importance
Interest rates create ripple 
effects throughout markets, 
making them crucial in 
finance and economics 
studies, MBA programs, and 
financial planning.
Page 3


Compound 
Interest and 
Simple Interests
Understanding Interest Rates
What is Interest?
Interest is the fee charged 
by lenders on borrowed 
principal. It represents the 
cost of borrowing money, 
with the percentage charged 
referred to as the interest 
rate.
Factors Affecting Rates
Interest rates are 
determined by inflation 
(changing value of money 
over time) and borrower 
credibility. Higher default 
risk typically leads to higher 
interest rates.
Economic Importance
Interest rates create ripple 
effects throughout markets, 
making them crucial in 
finance and economics 
studies, MBA programs, and 
financial planning.
Types of Interest Rates
1
Simple Interest
Calculated only on the 
original principal using a 
fixed rate. Formula: SI = 
(P × R × T)/100, where P 
is principal, R is interest 
rate, and T is time in 
years.
2
Fixed Returns
Interest does not earn 
additional interest. Final 
amount: A = P + SI, 
where A is total amount 
due at period end.
3
Example Application
Simple interest on 
¹68,000 at 20% for 2 
years: (68,000 × 20 × 
2)/100 = ¹27,200. Total 
repayment: ¹95,200.
Page 4


Compound 
Interest and 
Simple Interests
Understanding Interest Rates
What is Interest?
Interest is the fee charged 
by lenders on borrowed 
principal. It represents the 
cost of borrowing money, 
with the percentage charged 
referred to as the interest 
rate.
Factors Affecting Rates
Interest rates are 
determined by inflation 
(changing value of money 
over time) and borrower 
credibility. Higher default 
risk typically leads to higher 
interest rates.
Economic Importance
Interest rates create ripple 
effects throughout markets, 
making them crucial in 
finance and economics 
studies, MBA programs, and 
financial planning.
Types of Interest Rates
1
Simple Interest
Calculated only on the 
original principal using a 
fixed rate. Formula: SI = 
(P × R × T)/100, where P 
is principal, R is interest 
rate, and T is time in 
years.
2
Fixed Returns
Interest does not earn 
additional interest. Final 
amount: A = P + SI, 
where A is total amount 
due at period end.
3
Example Application
Simple interest on 
¹68,000 at 20% for 2 
years: (68,000 × 20 × 
2)/100 = ¹27,200. Total 
repayment: ¹95,200.
Simple Interest Applications
Investment Type Formula Application Typical Use Case
Fixed Deposits SI = (P × R × T)/100 Short-term savings
Multiple Investments Combined rate calculation Portfolio diversification
Loan Repayments A = P + SI Personal loans, mortgages
Interest Comparison Equal SI with different rates Investment decision making
Simple interest calculations are commonly used in banking systems for straightforward investments and loans. 
They allow investors to easily calculate returns and borrowers to understand repayment obligations without 
complex mathematics.
Page 5


Compound 
Interest and 
Simple Interests
Understanding Interest Rates
What is Interest?
Interest is the fee charged 
by lenders on borrowed 
principal. It represents the 
cost of borrowing money, 
with the percentage charged 
referred to as the interest 
rate.
Factors Affecting Rates
Interest rates are 
determined by inflation 
(changing value of money 
over time) and borrower 
credibility. Higher default 
risk typically leads to higher 
interest rates.
Economic Importance
Interest rates create ripple 
effects throughout markets, 
making them crucial in 
finance and economics 
studies, MBA programs, and 
financial planning.
Types of Interest Rates
1
Simple Interest
Calculated only on the 
original principal using a 
fixed rate. Formula: SI = 
(P × R × T)/100, where P 
is principal, R is interest 
rate, and T is time in 
years.
2
Fixed Returns
Interest does not earn 
additional interest. Final 
amount: A = P + SI, 
where A is total amount 
due at period end.
3
Example Application
Simple interest on 
¹68,000 at 20% for 2 
years: (68,000 × 20 × 
2)/100 = ¹27,200. Total 
repayment: ¹95,200.
Simple Interest Applications
Investment Type Formula Application Typical Use Case
Fixed Deposits SI = (P × R × T)/100 Short-term savings
Multiple Investments Combined rate calculation Portfolio diversification
Loan Repayments A = P + SI Personal loans, mortgages
Interest Comparison Equal SI with different rates Investment decision making
Simple interest calculations are commonly used in banking systems for straightforward investments and loans. 
They allow investors to easily calculate returns and borrowers to understand repayment obligations without 
complex mathematics.
E x a m p l e -
Nitu has an initial capital of ¹20,000. Out of this, she invests ¹8,000 at 5.5% in bank A, ¹5,000 
at 5.6% in bank B and the remaining amount at x% in bank C, each rate being simple interest 
per annum. Her combined annual interest income from these investments is equal to 5% of 
the initial capital. If she had invested her entire initial capital in bank C alone, then her annual 
interest income, in rupees, would have been:
a. 700 b.  800 c.  900 d.  1000