CATsyllabus.

com

Interests
Definition
If a person A borrows some money from another person B for a certain period, then after that specified period,
the borrower has to return the money borrowed as well as some additional money. This additional money that
borrower has to pay is called interest. The actually borrowed money by A is called principal (SUM). The
principal and the interest together is called amount. The interest that the borrower has to pay for every 100
R
rupees borrowed for every year is known as rate per cent per annum. It is denoted as R% per annum = .
100

The time for which the borrowed money has been used is called the time. It is denoted as T years. The
interest is directly proportional to the principal, the rate and time for which the borrowed sum is used.

If the interest on a certain sum borrowed for a certain period is reckoned uniformly, then it is called Simple
Interest and denoted as S.I.
P×R×T
∴ Simple Interest (S.I.) =
100
Where P = Principal or the sum borrowed
R = Rate per cent per annum
T = Number of years for which the borrowed money has been used.

Amount
PRINCIPAL (SUM) SIMPLE INTEREST AMOUNT→ money to
→ Actually borrowed → Interest accrued on be returned by the
money the sum borrowed borrower.

P + SI = A

PRT
∴ A = P + SI = P + or
100

⎡ RT ⎤
A = P ⎢1 + ⎥
⎣ 100 ⎦

Ex.1 A certain sum of money invested at some rate of interest triple it self in 4 years. In how many
years the principal will become 9 times of itself at the same rate?
Sol. When the principal is in simple interest the interest for every year will be same. In 3 years the amount
becomes 3 times the principal and we have
A = P + I. or 3P = P + I ⇒ I = 2P
i.e. the interest is 2 time the principal in 4 years or equal to principal in 2 years.
The interest will be equal to P in 2 years. So interest will be 8P in 16 years.
Amount after 16 years = P + 8P = 9P.
Hence the required answer will be 16 years

CATsyllabus.com
REPAYMENT OF DEBT IN EQUAL INSTALLMENTS:
Ex.2 Dr. M. I. Rajpoot wants to buy an air-conditioner for his family. He went to a shop and selects
an AC whose price is Rs. 12,700. The shopkeeper gave him two offers either you pay full
amount of Rs. 12,700 or pay only Rs. 4,000 and installment of Rs. 3000 per month for next 3
months just paying only Rs. 300 as interest. What is the rate of interest the shop keeper
charged to Rajpoot?
Sol. In these types of problems the interest charged is always calculated on the basis of the one month
principal not on the amount of the loan taken. Here first of all we have to calculate the one month
principal for every installment paid.
Principal for 1st month = loan amount = Rs 8,700
Principal for 2nd month = loan amount – 1st installment = Rs (8,700 – 3,000) = Rs. 5,700
Principal for 3rd month = Rs. (5,700 – 3,000) = Rs. 2,700
Total one month principal = Rs.(8700 + 5700 + 2700) = Rs. 17,100
1
Time = years, Interest = Rs. 300, Rate =?, Principal = Rs. 17,100
12
Using the formula
PRT 17100 × R × 1
I= ⇒ 300 = = 21.05%
100 100 × 12

Toolkit

If M amount is taken for n months at a simple interest of r% and installment paid per month is
“a”. Then we can find the required value with the help of following formula
⎡ a(n − 1)n ⎤ r 1
na − M = ⎢nM − ⎥ x
⎣ 2 ⎦ 100 12

Compound Interest
As discussed in the topic on ‘Simple Interest’, the principal (P) remains constant throughout the period for
which the money (principal) is borrowed. But, in case of compound interest, the total interest received in the
present year will be added to the original principal and for the following year the principal will be Amount
received (Principal + interest).
n
⎡ R ⎤
(a) A = P ⎢1 + (Compounded Annually)
⎣ 100 ⎥⎦

2n
⎡ R ⎤
A = P ⎢1 + (Compounded Half- yearly)
⎣ 2 x 100 ⎥⎦
4n
⎡ R ⎤
A = P ⎢1 + ⎥ (Compounded Quarterly)
⎣ 4 x 100 ⎦

Where, R = rate per cent year (% p.a.)

n = time in year,
A = Amount

CATsyllabus.com
 (b) Compound Interest (CI) = A – P
⎡⎛ R ⎞
t ⎤
C.I = P ⎢⎜1 + ⎟ − 1⎥
⎢⎣⎝ 100 ⎠ ⎥⎦

Ex.3 A certain sum of money doubles in 3 years, then in how many years it will become 8 times at
compound interest..
Sol. Think logically that in every 2 years, the principal becomes doubles of itself. So in 4 years it will be 4
times and in next two years it will be double of 4 times that is 8 times of original principal. So the
required answer would be 8 years.

Difference between CI & SI

For the first year the simple interest and compound interest, both are same, but with the next following years
the C.I will always be more than the S.I. Let P is the principal invested at r% rate per annum at S.I and C.I
respectively. What will be the difference between SI and CI for different years?

Simple
TIP
Years Compound Interest Difference SI remains constant
Interest
every year as the
After 1 Pr Pr
0 principal remains the
year 100 100
same every year.
2 2
After 2 Pr Pr ⎛ r ⎞ ⎛ r ⎞ CI increases every
+ P⎜ ⎟ P⎜ ⎟
year 100 100 ⎝ 100 ⎠ ⎝ 100 ⎠ year as principal
After 3 Pr Pr ⎛ r ⎞
2
⎛ r ⎞
3
⎛ r ⎞
2
⎛ r ⎞
3
increases every year.
+ 2P⎜ ⎟ + P⎜ ⎟ 3P⎜ ⎟ + P⎜ ⎟
year 100 100 ⎝ 100 ⎠ ⎝ 100 ⎠ ⎝ 100 ⎠ ⎝ 100 ⎠

Hence for every changing year, the principal goes on changing and accordingly the amount of interest
accrued on varying principal will be different in every year. The money lent under this condition is charged
with Compound Interest.
While solving the problems on Compound Interest, it is assumed that Interest is compounded yearly, unless
otherwise specified.

Equal annual installment

Let the value of each equal annual installment = Rs. A
Rate of interest = R % p.a. at CI
Number of installments per year = n
Number of years = T
∴ Total number of installments = n × T
Borrowed Amount = B
Then,
⎡ 100 ⎛ 100 ⎞
2
⎛ 100 ⎞ ⎤
n× T
A ⎢ +⎜ ⎟ + ......... + ⎜ ⎟ ⎥ =B
⎢⎣ 100 + R ⎝ 100 + R ⎠ ⎝ 100 + R ⎠ ⎥⎦

CATsyllabus.com
Ex.4 If a principle becomes 3 times in 10 years according to simple interest, what is the rate of
interest?
P × 10 × r
Sol. Principle becomes 3 times means, the interest is 2P. ∴2P = ⇒ r = 20%
100

Ex.5 A man took Rs. 5000 at 10% simple interest and gave it to another person at 10% compound
interest, which is being compounded annually. After 3 years, how much extra money he will
get?
5000 × 10 × 3
Sol. He has to pay 5000 + = 6500
100
3
⎛ 10 ⎞
He will get 5000⎜1 + ⎟ = 6655
⎝ 100 ⎠
So, the ans is 6655 – 6500 = Rs 155.

Ex.6 Certain money becomes double in 4 years according to simple interest. In how many years,
will it becomes 3 times?
Sol. If P is the principle, it becomes 2P in 4 years, that means the interest earned is 2P – P = P.
If it has to become 3 times means the interest has to become 2P, so, it takes double the time.
i.e. 2 × 4 = 8 years.

Ex.7 Certain money doubles itself according to compound interest in 3 years. How much time it
takes to become 4 times?
Sol. Since the money gets doubled in 3 years according to the Compound Interest, it again gets
doubled in the next 3 years. So it gets 4 times in 6 years.
∴n = 6 years.

Ex.8 Mr. A deposited certain amount in a bank exactly 5 years back @ of 8.8% simple interest. Mr. B
deposited the same amount of money exactly 2 years back, which is for compound interest,
compounded annually. Now both they got same amount of money at what rate of interest, Mr.
B deposited his money.
P × 5 × 8 .8
Sol. Mr. A will get P + = 1.44P
100
2
⎛ r ⎞
Mr. B will get P⎜1 + ⎟
⎝ 100 ⎠

Since both got the same money.

2
⎛ r ⎞
P⎜1 + ⎟ = 1.44P
⎝ 100 ⎠
⇒ r = 20%

Ex.9 On a sum of Rs. 1000, the C.I. for 2 years is twice the S.I. for 2 years when the rate is 11%. Find
the rate at which the interest is compounded annually?
Sol. S.I. at 11% for 2 years on a sum of Rs. 1000 = 220
Since C.I. is twice the S.I.

CATsyllabus.com
 2
⎛ R ⎞
∴ 440 = 1000 ⎜1 + ⎟ – 1000
⎝ 100 ⎠
2
1440 ⎛ R ⎞
⇒ = ⎜1 + ⎟
1000 ⎝ 100 ⎠
⎛ R ⎞
⇒ 1.2 = ⎜1 + ⎟ ⇒ R = 20%
⎝ 100 ⎠

Ex.10 Two equal sums are lent at the same time at 6% and 5% simple interest respectively. The former
is received 2 years earlier than the later, and the amount in each case is Rs. 2400. Find the sum?
Sol. Let the sum be Rs. x & the latest period be n years
x(6)(n − 2)
x+ = 2400 (I)
100
x(5)(n)
x+ = 2400 (II)
100
Solving these two equations simultaneously,
n = 12, x = 1500 The periods are 10 years & 12 years, Sum is Rs. 1500.

Ex.11 Ram invests a certain amount of money and earns a Compound Interest of Rs. 420 in the
second year and a C.I. of Rs. 462 in the third year. Calculate at what rate of interest did Ram
invest?
Sol. C.I. on third year – C.I. on second year = 462 – 420 = 42
Thus Rs. 42 is the interest on Rs. 420.
i.e. 10% of 420 Hence Rate = 10%.

Ex.12 Robin lend out Rs. 9 on the condition that the loan is payable in 10 months by 10 equal
installments of Re. 1 each. Find the rate of interest per annum.
Sol. Let the rate of interest per month be r
Total amount repaid = Rs.10 interest = Re. 1
r
(9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1) = 1
100
100
r=
45
Rate of interest per annum = (100/45) 12 = 26 2/3%.
Do you know?
(i) Stock of a company
Shares is the capital of the
The capital is divided into equal parts called shares. Shares may be of any value company that can be
divided in shares or no.
from Rs. 10 (or less) up to Rs. 100 (or more). Each person who purchases
of shares multiplied by
shares is called share holder and becomes a part owner of the company. He the face value of the
gets a share certificate indicating the number of shares he holds in the share.
company. Sometimes a company issues a certificate called the stock certificate (ii) Dividend is always
instead of share certificate indicating that a person holds a stock of say Rs. 5000 on the face value and
i.e. shares worth Rs. 5000. The value of a share mentioned in the share Income is always on the
certificate is called its nominal value, face value or par value (nominal value market value of the
does not indicate its cash value). The nominal value is a fixed quantity, but the share.
cash value may vary from hour to hour. The price of a share at any particular
time is called its market value. Shares can be preferred shares or ordinary shares.

CATsyllabus.com
Stock
The term stock is also applied to the various amounts of money which have been borrowed by Government or
by the corporations of cities. To pay the interest on different sums of money borrowed from time to time, the
Government sets aside certain funds.

Kinds of Stock
(1) Stock at Par: Stock is said to be at par if the market value of the stock is equal to its face value.
(Market Value = Face Value)
(2) Stock at a premium (or above par): Stock is said to be at a premium if the market value of the stock
is greater than its face value. (Market value = Face value + Premium)

(3) Stock at a discount (or below par): Stock is said to be at a discount if the market value of the stock
is less than its face value. (Market value = Face value – discount)

For example, If Rs. 100 stock is bought for Rs. 106, the stock is at a premium of
TIP
(1) If stock is given,
6% or 6 above par; but if it is bought for Rs. 96, the stock is at a discount of 4%
convert it into cash.
or 4 below par; and if Rs. 100 stock is bought for Rs. 100, it is said to be at par.
(2) If cash is given,
convert it into stock.

Distinction between stock & shares

The total investment of a company is called stock. This stock is divided into a number of shares of equal face
value. The total face value of a number of shares is also stock. For example, 100 shares of Rs. 10 each is Rs.
1000 stock and 10 shares of Rs. 100 each is also Rs. 1000 stock. Clearly a share is also a stock, but a
stock may not be a share, for it may consist of more than one share.

Dividend
When a company makes a profit, part of that profit is divided amongst the shareholders and it is called the
dividend. Dividend is always calculated on the face value of a share and is generally expressed as
percentage.

Brokerage
The stock is generally bought or sold through a broker who charges a small TIP
Rule: Add brokerage
commission called the brokerage. A buyer has to pay the market value together
while buying and
with the brokerage and a seller gets market value reduced by the brokerage i.e. subtract while selling.

Amount paid by the buyer = Market value + Brokerage.

Amount received by the seller = Market value – Brokerage.

Debentures
A debenture is an acknowledgement of a debt of a company. Debentures are equal parts of a loan raised by a
company. A debenture holder is a creditor of the company and is entitled to a fixed return every year
irrespective of profits. If a company is wound up, the amount due to debenture holders must be paid before
anything is paid to the share holders.

CATsyllabus.com
Ex.13 How much stock can be purchased with Rs. 52,625 at 5% above par? (Brokerage ¼ %)
⎛ 1⎞ 421
Sol. To purchase Rs. 100 stock we need Rs. ⎜100 + 5 + ⎟ = Rs. .
⎝ 4⎠ 4
421
If investment is Rs. ; stock purchased = Rs. 100.
4

4
If investment is Rs. 52,625; stock purchased = 100 × × 52,625 = Rs. 50,000.
421

Ex.14 A man buys Rs. 6000 stock at 5% discount and sells at 2% above par. Find his gain or loss.
1
Brokerage @ %.
2
Sol. Purchase Price of Rs. 100 stock = 100 – 5 = Rs. 95
1 191
Net purchase price of Rs. 100 stock = 95 + = Rs.
2 2
191 6000
Net purchase price of Rs. 6000 stock = × = Rs. 5730
2 100
Sale price of Rs. 100 stock = 100 + 2 = Rs. 102
1 203
Net sale price of Rs. 100 stock = 102 – = Rs.
2 2
203 6000
Net sale price of Rs. 6000 stock = × = Rs. 6090
2 100
Net gain = 6090 – 5730 = Rs. 360.

Alternate Method: From above –

203 191
Gain on Rs. 100 stock = – = Rs. 6
2 2
6
Gain on Rs. 6000 stock = × 6000 = Rs. 360.
100

Income Problem
A statement such as ‘5% stock @ 95’ means.
1. Face value of stock is Rs. 100.
2. Market value of Rs. 100 stock is Rs. 95.
3. Income (Annual) from this stock is Rs. 5.
Hence we get Rs. 5 as income or dividend (Annual) by investing Rs. 95 and obtain a stock worth Rs. 100.

NOTE: Percentage Return on the shares purchased less than the market value will always be more than
the actual return.

CATsyllabus.com
Ex.15 X invested an amount of Rs. 23,920 in 8% stock at 92. Find his net income if he pays 4%
income tax.
Sol. Cost of Rs. 100 stock = Rs. 92
Income on Rs. 92 = Rs. 8
8×4 8
Income tax = = Rs.
100 25
8 192
Net income =8– = Rs.
25 25
192
Now if amount invested Rs. 92, net income = Rs.
25
192 × 23920
If amount invested Rs. 23,920, net income = = Rs. 1996.80.
25 × 92

CATsyllabus.com