JAIIB · AFM

CALCULATION OF INTEREST AND ANNUITIES

Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.

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What is simple interest and how is it calculated?

Simple interest is interest calculated only on the principal amount. It is computed using the formula SI = P × R × T / 100, where P is principal, R is rate per annum, and T is time in years.

What is the formula for simple interest?

SI = Principal × Rate × Time / 100

What is compound interest and how does it differ from simple interest?

Compound interest is interest calculated on both the principal and previously accumulated interest. Unlike simple interest, it grows exponentially because interest earned in each period itself earns interest in subsequent periods.

If principal is Rs 10,000 at 10% per annum for 2 years, what is the simple interest?

Rs 2,000

What is the formula for compound interest when compounding is done annually?

The compound amount is A = P × (1 + r/100)^n, where P is the principal, r is the annual interest rate, and n is the number of years. Compound interest = A - P.

What does the term 'principal' refer to in interest calculations?

The original sum of money borrowed or invested

How does the frequency of compounding affect the amount of interest earned?

More frequent compounding results in higher interest earned. For the same nominal rate, interest compounded quarterly is more than interest compounded semi-annually, which in turn is more than interest compounded annually.

What is the formula for Amount when simple interest is applied?

A = P + SI = P(1 + rt/100)

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