Interest Formula

Formulas of interest usually include formulas of simple and compound interests. Simple interest is that interest calculated and charged on the principal for the entire duration of the loan regardless of what has been paid or charged as interest in the past and interest calculated on any other consideration associated with money. In general, simple interest would apply to short loans of twelve months or less issued by banking companies. The same applies to money that will be lent for a similar short period of time. A simple interest rate is a ratio. Generally, it will be expressed as a percent.

The compound interest is the interest calculated on the principal and the interest that is accumulated over the previous tenure. Thus, CI is also known as "interest on interest". It plays a crucial role in deciding the interest amount of a loan or investment. 

The formulas for both compound interest and simple interest are given below:

Formulas of Interests Simple and Compound End

SI formula 

Simple Interest = P × R × T

Where, 

P- principal

R- rate

T- time

CI formula

Example Using Interest Formulas

Q1: Find the simple and compound interest for 2 years for the sum of Rs 4000 which is borrowed at a rate of 7%?

Solution:

Simple Interest = Principal × Rate × Time = PTR/100

The simple interest = 4000 × (7 ⁄ 100) × 2

Simple Interest = 560

Simple Interest for 2 years is Rs. 560

So, Compound Interest = 4000 × (1 + 7 ⁄ 100)² − 4000

Compound Interest = (4000 × 1.1449) − 4000

Compound Interest = 580

∴ 2 years compound interest = Rs 580

Q2: The sum of Rs. 25000 amounts to Rs. 30000 at the end of 4 years. Find the rate of interest by simple interest.

Solution:

Principal = P = Rs. 25000

Time = T = 4 years

Amount at the end of 4years = Rs. 30000

SI = Rs. 30000 – Rs. 25000 = Rs. 5000

SI = PTR / 100

R = SI × 100 / PT

R = 5000 × 100/(25000 × 4)

R = 5%

Therefore, the rate of interest = 5%

Q3: Compute the compound interest on Rs. 13000 at 10% for 2 years, compounded yearly.

Solution:

Given,

Principal = P = Rs. 13000

Rate of interest = r = 10%

Time = t = 2 years

Amount on CI = P(1 + r/100)2

            = 13000(1 + 10/100)2

            = 13000 (1 + 0.1)2

            = 13000(1.1)2

            = 13000 x 1.21

            = 15730

CI = Amount on CI – Principal

     = Rs. 15730 – Rs. 13000

     = Rs. 2730

Therefore, compound interest = Rs. 2730

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