Focus Topic: Simple Interest (Arithmetic/Commercial Mathematics)
Basic Concept and Formula for Simple Interest
The first four days of the CAT preparation plan were all about the topic, Percentage. Now that we have covered the topic exhaustively, we shift to the next topic in Mathematics: Simple Interest.
Simple Interest, effectively, is nothing else but an application an application of the concepts of Percentages. If you understand Percentages, you can easily understand how to calculate Simple Interest. In fact, the terminology of loans and interest payments is so common in our everyday lives that you should already possess a rudimentary understanding of this concept.
The first basic question is what is Simple interest?
Suppose you took a loan of Rs 10000 from a money lender for one year. You used his money. Now is it that you are going to pay him back Rs 10000 after one year?
Well, the answer to this question is no. The money lender will obviously want some returns on his investment. Most of the times, the person or banks or companies who give loans charge some percentage over the initial amount loaned to you (this initial amount is called the principal). This extra amount charged on the principal is called interest.
So, if the money lender asks you to pay say 10% interest, then that means that he is charging 10% of Rs 10000 from you i.e. he wants his original money back and in addition to it, he wants 10% more money.
Definition of Simple Interest
Simple interest is the interest charged on the principal, that is, the original amount that was taken as a loan or placed as an investment. It is determined by multiplying the interest rate by the principal by the time duration of the payments.
Remember, while calculating simple interest, the interest is only calculated on the principal amount and not on the interest accrued over the same period of time.
Formula for Simple Interest:
Simple Interest: (P x R x T)/100
P: Principal (original amount)
R: Rate of Interest (in %)
T: Time period (yearly, half-yearly etc.)
This explains the basic concept of Simple Interest. We have put up a detailed article that explains this concept. There is also an exercise which highlights the application of this basic concept. Click on the links below in order to understand this concept in detail.
Quantitative Aptitude Question of the day
A mobile was bought for Rs 6000 and sold the same day for Rs 6531.2 at a credit of 8 months and yet there was a gain of 4%. What is the rate percent per annum?