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Simple and Compound Interest

Simple and Compound Interest​

Simple interest:

SI = PRT / 100
Amount = P + SI

Compound interest:

Amount = P * (1 + R/100)^T
CI = Amount - P

Effective rate:

a% followed by b% compound growth:
Effective rate = a + b + ab/100

Difference between CI and SI:

For 2 years:
CI - SI = P * (R/100)^2

For 3 years:
CI - SI = P * [3(R/100)^2 + (R/100)^3]

Half-yearly or quarterly:

Half-yearly: rate becomes R/2, time periods become 2T
Quarterly: rate becomes R/4, time periods become 4T

Installments shortcut:

Present value of equal installments = sum of each installment discounted to today

Common traps:

  • SI grows linearly; CI grows successively.
  • Match rate period with time period.