useful to learn to calculate simple and compound interest

1. Prepared by
Mrs. Mahitha Davala
M.Com.,M.B.A.

2.  Mathematics of finance deals with the mathematical
problems based on”time value of money”
 Time preference for money is important due to three
factors
(a) for current consumption
(b) for inflationary economy
(c) for reinvestment purpose.

3.  The mathematics of finance can be broadly classified
into two types
 1. Compound value or Compounding
concept.
2. Present Value or discounting
concept.
The above two concepts on Value of money has been
explained through the method of ‘interest’ calculation.

4.  Simple Interest
 Compound Interest
 Depreciation

5. On the basis of calculation, interest is of two types.
 Simple Interest.
 Compound Interest.

6.  Simple interest is one which is calculated always at a
fixed rate
S.I = (P×n×r)
100
Where
P=Principal
n= number of years.
r=rate of interest

7.  Compound interest is one which is calculated at a given
rate percent of the accumulated sum of the principal
and the earlier interests left unpaid.
 Thus, compound interest at the end of every period is
converted into the principal for the next period.

8.  To find out the Amount or Sum at the end of a
stipulated period:
 Compound Interest :
A=P(1+r)n
C.I=A-P

9.  To find the Principal or present value of a certain amount:
 To find number of years for which a fund needs to be invested:
 To find the rate of Interest:

10. Annually A=P(1+i)ⁿ
Semiannually A=P[1+(i/2)]2n
Quarterly A=P[1+(i/4)]4n
Monthly A=P[1+(i/12)]12n
Continuously A=P ₑⁿⁱ

11.  Depreciation means gradual decrease in the value of an asset which arises due to
normal wear and tear, obsolescence etc.
 It represents a portion of the total cost of fixed asset which has expired and as
such represented as expense in the process of its use during a particular
accounting period.
 For the purpose of calculating the amount of depreciation for a particular period
a number of methods are used.
 Fixed instalment method, Diminishing balance method, Sinking fund
method,working hours method etc.
 But fixed instalment method and Diminishing balance methods are popularly
used.

12.  Fixed Instalment method:
 Diminishing balance or Reducing balance method:
 Suppose a machinery Price of Rs.K depreciates at a rate of r% annually for n
years and the expected scrap value after ‘n’ years will be (K-S)=P
 Here, P will be treated as the present value of the fixed asset. Then the depreciated
value per annum will be
Depreciated value:
P=[1-(r/100)]ⁿ

13.  For worked out problems on simple interest
click the links below
 https://www.youtube.com/watch?v=KCpb6xn
-aNg&t=5s
 https://www.youtube.com/watch?v=T7Myzoy
IG7g&t=1s
 https://www.youtube.com/watch?v=dp0ryfA
7e0c&t=48s

14. Thank You