ACCOUNTING & FINANCE FOR BANKERS - Simple & Compound Interest

JAIIB/DBF Study Notes

ACCOUNTING & FINANCE FOR BANKERS

Simple Interest
'Simple' interest or 'flat rate' interest is the amount of interest paid each y ar in a fixed percentage
of the amount borrowed or lent at the start.
Formula for calculating simple interest :
Interest = Principal x Rate x Time (PRT), where:
'Interest' is the total amount of interest paid
'Principal' is the amount lent or borrowed
'Rate' is the percentage of the principal charged as interest ea h year.
'Time' is the time in years of the loan.
Example :
Principal: 'P' = Rs. 50,000, Interest rate: 'R' = 10% = 0.10, Repayment time: T = 3 years. Find the
amount of interest paid. Interest = PRT = 50,000x0.10x3 = Rs. 15,000/- Compound Interest Compound interest is paid on the original principal and accumulated part of interest. Formula for calculating compound interest : P = A(1 +r/n)^nt, where P = the principal A = the amount deposited r = the rate (expressed as fraction, e.g. 6 per cent = 0.06) n = number of times per year that interest is compounded                    t = number of years invested Frequently compounding of Interest. If the interest is compounded : Annually = P (1 + r) Quarterly = P (1 + r/4)^4 Monthly = P (1 + r/12)^12 Example : The compound interest on Rs. 30,000 at 7% per annum is Rs. 4347. The period (in years)  is: Amount = Rs. (30000 + 4347) = Rs. 34347. Let the time be n years. Then 30000(1+7/100)^n = 34347 (107/100)^n = 34347/30000 (107/100)^n = 11449/10000 (107/100)^n = (107/100)^2 n = 2 years. The Rule of 72: Allows you to determine the number of years before your money doubles whether in debt or investment. Divide the number 72 by the percentage rate.