Simple Interest and Compound Interest chapter is an integral part of Arithmetic chapter, which also means that apart from the quantitative aptitude section, it also holds great relevance in the Data Interpretation Section for the exam takers.
In this article, we would guide you about the relevance of understanding Simple and Compound Inertest for your MBA entrance examinations. Are you aware of the strategic significance of this chapter in enhancing your overall percentile?
Out of the expected 8-10 questions in CAT exam from the arithmetic chapter, you can expect to get approximately 1-2 questions from SI and CI topic in the quantitative aptitude section. In addition, an in-depth application of this chapter would aid you in solving the Data Interpretation Section as well.
Let us move on to understand the basic concept of this chapter. A thorough understanding of the given below notes will clarify all your doubts regarding the SI and CI calculations.
The value of money is not constant. It changes. When borrowed today, it should be paid tomorrow with an extra charge that is known as interest.
There are two types of interest. They are:
1. Simple Interest
Formula to calculate simple interest is the following:
Where P is the Principal amount (for which interest is to be paid)
N is the time (in number of years)
R is the rate of interest
The amount to be paid with interest after a certain time is the sum of the principal amount and its interest.
Formula to calculate time:
Time (in years) can be calculated by the formula below if the total Interest (I) and Interest for one year on the Principal amount (I1) are known.
Where I is the total Interest
I1 is the Interest for one year
2. Compound Interest
- When interest is compounded annually,
Where P is the Principal amount (for which interest is to be paid)
N is the time (in number of years)
R is the rate of interest
A is the Total amount after interest
- When interest is compounded half yearly,
- When interest is compounded quarterly,
Formula to calculate difference between SI and CI over two years:
Formula for depreciation:
Where A1 is the value after depreciation
A0 is the value before depreciation
R is the rate of depreciation
T is the time period or duration of depreciation
Population change:
Change in population can also be calculated using the compound interest formula. The sign can be positive or negative as the population increases or decreases.
Where P is the original population
R is the rate of change of population
N is the number of years
Annual growth rates
Where (Final Value – Initial Value) is the Absolute growth
Average Annual Growth Rate (AAGR):
Where N is the number of years
Compound Annual Growth Rate (CAGR):
Where N is the number of years
Note: If N (number of years) is more than 1, CAGR is less than AAGR.
We hope that these concepts along with their associated practice test would help you in your preparation of Simple Interest and Compound Interest chapter.
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