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Quant Notes: Compound Interest | The Complete Lesson (Part-2)

Compound Interest Tricks: Results related to Multiple Compounding in a year:

In each of the following results, we use the following denotations:
A = future value
P = principal amount (initial investment)
r = annual nominal interest rate
n = number of times the interest is compounded per year
t = number of years for which the money is borrowed

Compound Interest Trick 1: If interest is not compounded yearly then

compound interest tricks

where

n= number of times compounding is done
if compounding is done half yearly then n = 2
if compounding is done quarterly  then n = 4
when compounded monthly then n=12

Amount for Half Yearly Compounding, A = P {1+(R/2)/ 100}2T (compound interest applied two times in a year)
Like Half Yearly Compound Interest, we can calculate the amount for Quarterly Compounding.

Amount for Quarterly Compounding,A = P {1+(R/4)/ 100}4T

Example 1: Sona deposited Rs. 4000 in a bank for 2 years at 5% p.a.rate. Find the amount received by her from the bank if interest is compounded half yearly.

Solution: 
Principal value = Rs. 4000
Rate = 5%
Time = 2 years
Since the interest is compounded half yearly so 2 years = 4 times in two years
So, we have
A = P {1+(R/2)/ 100}2T
A= 4000{1+ (5/2)/100}4
A = 4000 x 41/40 x 41/40 x 41/40 x 41/40
A = Rs. 4415.25
So, Sona received Rs. 4415.25 from the bank after two years

Example 2: Manpreet lent Rs 5000 to Richa at 10% rate for 1 year. But she told her that she will take her money on compound interest. Find the amount of interest received by Manpreet when compounded quarterly.

Solution: 
Principal value = Rs. 5000
Rate = 10%
Time = 1 year
The interest is compounded quarterly, that is 4 times in 1 year.
We use the formula=A = P {1+(R/4)/ 100}4T
A= 5000{1+ (10/4)/100}4
A = 5000 x 41/40 x 41/40 x 41/40 x 41/40
A = Rs. 5519.064
So, Manpreet received Rs. 5519.064 from Richa and the total amount of interest received by her is 5519.064 – 5000 = Rs. 519.06

Compound Interest Tricks: When the rate % is not same for every year and interest is taken on yearly basis then amount can be calculated as:

Example 3:  Find the compound interest on 16000 in 2 years , while rate of interest at first year is 3% and for the second year is 4%.

Solution: 

Compound Interest Tricks: When interest is compounded yearly and time is given in fraction

If time is given in mixed fraction

Use formula,

Example 4: The compound interest on Rs. 8,000 at 15% per annum for 2 years 4 months, compounded annually is:

Solution:

Compound Interest Tricks: Practice Questions

Question 1: A certain sum, invested at 4% per annum compound interest, compounded half – yearly, amounts to Rs 7,803 at the end of one year. The sum is

A. Rs 7,000
B. Rs 7,200
C. Rs 7,500
D. Rs 7,700

Answer and Explanation

Option CLet the sum be Rs. P.

As, the interest is compounded half-yearly.

R = 2%, T = 2 half years

Question 2: If the rate of interest be 4% per annum for first year, 5% per an­num for second year and 6% per annum for third year, then the compound interest of Rs. 10,000 for 3 years will be

A. Rs. 1,600
B. Rs. 1,625.80
C. Rs. 1,575.20
D. Rs. 2,000

Answers and Explanations

Option CWhen the rate of interest is different for the different years, we can use the following formula to find the amount.

Question 3: The compound interest on Rs. 16,000 for 9 months at 20% per annum, interest being com­pounded quarterly, is

A. Rs. 2,520
B. Rs. 2,524
C. Rs. 2,522
D. Rs. 2,518

Answers and Explanation

Option CThe interest is compounded quarterly. So

Question 4: The compound interest on Rs. 6,000 at 10% per annum for 3/2 years, when the interest be¬ing compounded annually, is
A. Rs. 930
B. Rs. 870
C. Rs. 910
D. Rs. 900

Answers and Explanations

Option A
Compound Interest Shortcuts: Tooltip-1

A sum of money placed at compound interest becomes x time in ‘a’ years and y times in ‘b’ years. These two sums can be related by the following formula:

Derivation for this result:
We use the basic formula for calculating Compound Interest:

For condition 1, a sum of money becomes x times in “a” years.
Therefore, using the formula for calculating Compound Interest:

compound interest shortcuts

Example-1: A sum of money placed at compound interest doubles itself in 4 years.In how many years will it amount to 16 times itself?

compound interest shortcuts and results

Compound Interest Shortcuts: Tooltip 2

If an amount of money grows up to Rs x in t years and up to Rs y in (t+1) years on compound interest, then

Derivation for this result:

Principal + CI for t years = x ……   (1)
Principal + CI for (t+1) years= y  …….  (2)
(2) – (1) =>CI for last year = y-x
Which is basically the simple interest upon x

Example-2: An amount of money grows upto Rs 3000 in 3 years and upto Rs 4000 in 4 years on compound interest. What will be the rate percent?

Solution:
Principal + CI for 3 years = 3000 ……   (1)
Principal + CI for 4 years= 4000  …….  (2)
Hence (2) – (1) =>CI for 4th year = 4000-3000= Rs 1000
Which is basically the simple interest upon 3000
shortcut tricks for compound interest

 

 

 

 

 

Compound Interest Shortcuts: Tooltip 3

A sum at a rate of interest compounded yearly becomes Rs. A1 in n years and Rs. A2 in (n + 1) years, then 
compound interest shortcut formula

Example-3: A sum of money invested at compound interest amounts to Rs. 100 at the end of first year and Rs. 120 at the end of second year. The sum of money is :

Solution:
Simple Interest for one year = compound interest for one year
Interest on Rs. 100 for 1 year = 120-100= Rs. 20

shortcut method for compound interest

Compound Interest Shortcut: Tooltip 4

If a certain sum becomes x times of itself in t years, the rate of compound interest will be equal to

shortcut formula for compound interest

Derivation for this result:

Use the formula for Compound Interest Calculation:

Sum becomes x times of itself in t years so

Example 4:  If a certain sum becomes 16 times in 2 years ,what will be the rate of compound interest?

Solution:

Using the formula derived above:

Compound Interest Shortcut: Tooltip 5

If the compound interest on a certain sum for 2 years is CI and simple interest for two years is SI ,then rate of interest per annum  is

Derivation for this result:

Example 5: If the compound interest on a certain sum for 2 years is 20rs and simple interest for two years is 10rs  ,then what wil be the  rate of interest per annum  ?

Solution:

Using the formula derived above:


Compound Interest Solved Problems using Compound Interest Shortcuts:

Let’s go through some compound interest solved problems and learn how to use and implement compound interest shortcuts in actual problem solving. Remember, till the time you actually solve questions using these tricks, you won’t be able to memorize and understand them. Go through compound interest solved problems and hone your skills for the topic.

Question 1: What sum of money at com­pound interest will amount to Rs. 650 at the end of the first year and Rs. 676 at the end of the second year?

A. Rs. 600
B. Rs. 600.25
C. Rs. 625
D. Rs. 625.25

Answers and Explanations

Option CUsing the formula we have derived in the article for this exercise:

If an amount of money grows up to Rs x in t years and up to Rs y in (t+1) years on compound interest, then

Question 2: If the amount is 2.25 times of the sum after 2 years at com­pound interest (compound annu­ally) , the rate of interest per an­num is :

A. 25%
B. 30%
C. 45%
D. 50%

Answers and Explanations

Option DUsing the formula we have derived in the article for this exercise:

If a certain sum becomes x times of itself in t years, the rate of compound interest will be equal to

Question 3: A sum of money doubles itself in 4 years at compound interest. It will amount to 8 times itself at the same rate of interest in:

A. 18 years
B. 12 years
C. 16 years
D. 24 years

Answes and Explanations

Option BUsing the formula we have derived in the article for this exercise:

A sum of money placed at compound interest becomes x time in ‘a’ years and y times in ‘b’ years. These two sums can be related by the following formula:

Question 4: A sum borrowed under com­pound interest doubles itself in 10 years. When will it become fourfold of itself at the same rate of interest?

A. 15 years
B. 20 years
C. 24 years
D. 40 years

Answers and Explanations

Option BUsing the formula we have derived in the article for this exercise:

A sum of money placed at compound interest becomes x time in ‘a’ years and y times in ‘b’ years. These two sums can be related by the following formula:

Question 5: A sum of money becomes eight times of itself in 3 years at com­pound interest. The rate of interest per annum is

A. 100%
B. 80%
C. 20%
D. 10%

Answers and Explanations

Option ALet the principal be Rs. x and the rate of compound interest be r% per annum.

Then,

Ques. A sum of money lent at compound interest for 2 years at 20% per annum would fetch Rs.723 more, if the interest was payable half yearly than if it was payable annually. The sum is ____
A.Rs. 20000
B.Rs. 15000
C.Rs. 30000
D.Rs. 45000
E.None of these
Answer & Explanation
Answer – C.Rs. 30000
Explanation :
sum – Rs.x
C.I. compounded half yearly = (4641/10000)x
C.I. compounded annually = (11/25)x
(4641/10000)x – (11/25)x = 723
x = 30000

Ques. A sum of Rs.7140 is to be divided between Anita and Bala who are respectively 18 and 19 yr old, in such a way that if their shares will be invested at 4% per annum at compound interest, they will receive equal amounts on attaining the age of 21 year. The present share of Anita is
A. 4225
B. 4352
C. 3500
D. 4000
E. None of these
Answer & Explanation
Answer – C. 3500
Explanation :
Amount got by Anita after 3 yr = Amount got by Bala after 2 yr
x*(26/25)³ = (7140 – x)*(26/25)
26/25 = 7140 – x / x
x = 3500

Ques. Suresh borrows Rs.6375 to be paid back with compound interest at the rate of 4 % pa by the end of 2 year in two equal yearly installments. How much will each installment will be?

A.3840
B.3380
C.4800
D.Data inadequate
E.None of these
Answer & Explanation
Answer – B.3380
Explanation :
25x/26 + 625/676x  = 6375
x = (6375 * 676)/1275 = 3380

Ques. A sum of Rs. 8400 was taken as loan. This is to be paid in two equal annual installments. If the rate of interest be 20% compounded annually, then the value of each installment is
A. 5400
B. 5700
C. 5100
D. 5200
E. None of these
Answer & Explanation
Answer – A. 5400
Explanation :
Let value of each installment be X.
X/(1 + 20/100) + X/(1 + 20/100)² = 8400
⇒ X(5/6 + 25/36) = 8400
⇒ X(56/36) = 8400
X = 5400

Ques. During the first year the population of a village is increased by 5% and the second year it is diminished by 5%. At the end of the second year its population was 31500. What was the population at the beginning of the first year?
A. 35500
B. 31578
C. 33500
D. 33000
E. None of these
Answer & Explanation
Answer – B. 31578
Explanation :

x * 105/100 * 95/100 = 31500
x = 31500 * 100/105 * 100/95
D = 31578

Ques. If Rs. 7200 amounts to Rs.10368 at compound interest in a certain time , then Rs. 7200 amounts to what in half of the time?
A. 8640
B. 8600
C. 8800
D. 8520
E. None of these
Answer & Explanation
Answer – A. 8640
Explanation :
Let rate = R% and time = n year
Then, 10368 =7200(1+R/100)n
⇒ (1+R/100)n = 10368/7200 = 1.44
∴ (1 + R/100)n/2 = √1.44 = 1.2
∴ Required amount for n/2 yr
= 7200(1+ R/100)n/2
= 7200 x 1.2 = Rs. 8640

Ques. A part of 70000 is lent out at 10% annum. The rest of the amount is lent out at 5% per annum after one year. The ratio of interest after 3 years from the time when first amount was lent out is 1:2. Find the second part that was lent out at 5%.
A.40000
B.50000
C.60000
D.48000
E.55000
Answer & Explanation
Answer – C.60000
Explanation :
10*3*x/5*2*y = 1/2
x/y = 1/6
6/7*70000 = 60000

Ques. There is 50% increase in an amount in 5 years at simple interest. What will be the compound interest of Rs. 12,000 after 3 years at the same rate?
A.Rs. 2255
B.Rs. 2792
C.Rs. 3580
D.Rs. 3972
E.None of these
Answer & Explanation
Answer – D.Rs. 3972
Explanation :
In S.I,
Let P=100, I=50, T=5 yrs
R = 50*100/100*5 = 10%
In C.I,
P = 12000, T=3 yrs, R= 10%
C.I = [12000*(1 + 10/100)^3 – 1 ] C.I = 3972.

Ques. Karthik lends a certain amount to Vignesh on simple interest for two years at 20%. Vignesh gives this entire amount to Kamal on compound interest for two years at the same rate annually. Find the percentage earning of Vignesh at the end of two years on the entire amount.
A.3%
B.3(1/7)%
C.4%
D.5(6/7)%
E.None of these
Answer & Explanation
Answer – C.4%
Explanation :
SI=20*2=40%
CI=20+20+(400/100)=44%
Diff = 44-40=4%

Ques. A man borrows 3000 rupees at 10% compound interest. At the end every year he pays rupees 1000 back. How much amount should he pay at the end of the fourth Year to clear all his debt?
A.Rs. 680.5
B.Rs. 651.3
C.Rs. 751.3
D.Rs. 790.3
E.None of these
Answer & Explanation
Answer – C.Rs. 751.3
Explanation :
After one year amount = 3000 *110/100 = 3300
He pays 1000 back, so remaining = 3300-1000 = 2300
After two year amount = 2300 *110/100 = 2530
He pays 1000 back, so remaining = 2530-1000 = 1530
After three year amount = 1530*110/100 = 1683
He pays 1000 back, so remaining = 1683-1000= 683
After fouth year = 683 * 110/100 = 751.3

Ques. Rahul saves an amount of 800 every year and then lent that amount at an interest of 10 percent compounded annually. Find the amount after 3 years.
A.Rs. 1822.8
B.Rs. 2252
C.Rs. 2550.50
D.Rs. 2912.8
E.None of these
Answer & Explanation
Answer – D.Rs. 2912.8
Explanation :
800*(11/10)³=1064.8
800*(11/10)²=968
800*(11/10)=880
Total amount =2912.8

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