PPT: Understanding Interest Rates | CSAT Preparation - UPSC PDF Download

 Page 1


Understanding Interest 
Rates
Page 2


Understanding Interest 
Rates
What is Interest?
Definition
Interest is the amount 
charged by the lender from 
the borrower on the principal 
loan sum. It's the cost of 
renting money.
Value of Money
Money's value changes over 
time due to inflation. ¹100 
today won't buy the same 
tomorrow.
Borrower Credibility
Higher risk of default means higher interest rates. Lower risk 
means lower rates.
Page 3


Understanding Interest 
Rates
What is Interest?
Definition
Interest is the amount 
charged by the lender from 
the borrower on the principal 
loan sum. It's the cost of 
renting money.
Value of Money
Money's value changes over 
time due to inflation. ¹100 
today won't buy the same 
tomorrow.
Borrower Credibility
Higher risk of default means higher interest rates. Lower risk 
means lower rates.
Types of Interest Rates
Simple Interest
Calculated only on the original principal amount. Does not 
earn interest on itself.
Compound Interest
Interest earns interest after each time period. Most common 
in banking systems.
Page 4


Understanding Interest 
Rates
What is Interest?
Definition
Interest is the amount 
charged by the lender from 
the borrower on the principal 
loan sum. It's the cost of 
renting money.
Value of Money
Money's value changes over 
time due to inflation. ¹100 
today won't buy the same 
tomorrow.
Borrower Credibility
Higher risk of default means higher interest rates. Lower risk 
means lower rates.
Types of Interest Rates
Simple Interest
Calculated only on the original principal amount. Does not 
earn interest on itself.
Compound Interest
Interest earns interest after each time period. Most common 
in banking systems.
Simple Interest
Definition
Interest calculated on the original amount borrowed for the 
entire duration, using a fixed rate.
Formula
SI = (P × R × T)/100, where P = Principal, R = Rate, T = Time 
period
Amount to Repay
A = P + SI, where A is the final amount to be repaid
Example
SI on ¹68,000 at 20% p.a. for 2 years = ¹27,200
Page 5


Understanding Interest 
Rates
What is Interest?
Definition
Interest is the amount 
charged by the lender from 
the borrower on the principal 
loan sum. It's the cost of 
renting money.
Value of Money
Money's value changes over 
time due to inflation. ¹100 
today won't buy the same 
tomorrow.
Borrower Credibility
Higher risk of default means higher interest rates. Lower risk 
means lower rates.
Types of Interest Rates
Simple Interest
Calculated only on the original principal amount. Does not 
earn interest on itself.
Compound Interest
Interest earns interest after each time period. Most common 
in banking systems.
Simple Interest
Definition
Interest calculated on the original amount borrowed for the 
entire duration, using a fixed rate.
Formula
SI = (P × R × T)/100, where P = Principal, R = Rate, T = Time 
period
Amount to Repay
A = P + SI, where A is the final amount to be repaid
Example
SI on ¹68,000 at 20% p.a. for 2 years = ¹27,200
Useful Results based on Simple Interest
Example Problem
Nitu invests ¹20,000 across three banks with different 
interest rates. Her combined annual interest equals 5% of 
her initial capital.
If she had invested her entire capital in bank C alone, her annual interest income would be ¹800.