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Installments in Compound Interest

Do you know, If someone wants to buy a Motor Cycle, or a costly mobile or if your father wants to purchase a new flat, they generally take loan from a bank or from a ﬁnancier. They need to pay monthly installments. Today, across the world, all the EMI's (Equated monthly Installments) are being calculated on compound interest. So after reading this article, you must be in a position to calculate the EMI you are going to pay for your new scooter purchase!!

Before that, let us try to understand the meaning of compounding and discounting. We know that daily prices of the goods increase at a rate. Assume, A product which costs Rs.100 costs Rs.110 next year and Rs.121 that next year. Suppose, You lend Rs.100 to your friend and he promised to give you Rs.100 after 1 year. Do you accept it? Out of friendship we accept. But think like a ﬁnancier. If you receive Rs.100 after 1 year the value of this 100 rupee may not buy the same amount of goods it would have purchased today as the prices went up to Rs.100. So we need to charge some interest. So how much is the interest? We use the formula of compound interest.

P (1 +

R

100

) = A ⇒ 100 (1 +

R

100

) = 110

It is clear that interest rate is 10% That means, if the interest rate is 10%, Rs.100 today is equal to Rs.110 earned after 1 year and Rs.121 after 2 years. Formula for installments in Compound Interest:

If a buyer sells a product to you at full payment get some interest on your amount for n periods. This total amount should equal to sum of all EMI's and the interests accrued on each EMI for the remaining period. Then only the seller did not get any loss. Assume we have taken a loan at period 0 and have to pay installments at the end of 1, 2, 3, 4th periods of x each. Now loan amount plus the interest on the total loan amount P at R% rate for 4 periods is equal to all the EMI's and interests earned for the remaining period. That is the EMI in the period 2 earns 2 periods interest and EMI in the 3rd period earns only 1 period interest.

P (1 +

R

100

) 4

=

x(1 +

R

100

) 3

+

x(1 +

R

100

) 2

+

x(1 +

R

100

) 1

+

x Present Value method:

We should also solve this problem by Present Value (PV method). You learn this concept in any ﬁnance text book!! We already learnt that Rs.110 earned after 1 year is equal to Rs.100 earned today if the interest rate is

10%

So Rs.110 discounted at 10% gives you Rs.100. Don't worry how to do this. This is quite simple. You have to calculate P from the compound interest formula.

P =

A

(1 +

R

100

) n

Here A = Rs.110, R = 10%, n = 1. From the above diagram, if we have taken loan for 4 periods, the last installment should discount for 4 periods and so on.

So

P

=

x

(1 +

R

100

) 1

+

x

(1 +

R

100

) 2

+

x

(1 +

R

100

) 3

+

x

(1 +

R

100

) 4 Solved Examples

1. A person borrowed a sum of Rs 6000 at 10% p.a., interest compounded annually. If the money is to

be repaid in three equal annual installment, each payable at the end of the year, then what is the value

of each installment?

a. Rs. 2,000

b. Rs 2,413

c. Rs 2,314

d. Rs 2,662

Sum borrowed = Rs 6000 Interest = 10% at compounded annually and time = 3 years Let x be the amount paid at the end of each of the 3 years.

⇒ 6000(1 +

10

100

) 3

=

x(1 +

10

100

) 2

+

x (1 +

10

100

) + x

⇒ 6000(1.1) 3 = 1.21x + 1.1x + x

x =

6000(1.331)

3.31

= 2412.68

So Installment amount is Rs.2413

2. Three equal installment, each of Rs 200, were paid at the end of year on a sum borrowed at 20%

compound interest compounded annually. Find the sum.

a. Rs 600

b. Rs 400

c. Rs 421.30

d. Rs 432.10

Installments each of Rs 200 for 3 years.

x(1 +

20

100

) 3

=

200(1 +

20

100

) 2

+

200 (1 +

20

100

)

x(1.2) 3 = 200(1.44) + 200(1.2) + 200

x(1.718) = 200(3.64)

+

200 (1 +

20

100

)

x =

200(3.64)

1.718

= 421.3

Alternate Method:

we use discounting method. We discount the installments for the present value.

P =

P

=

200

+

( 1 +

200

1.2

+

20

)

100

200

1.44

1

+

P = 421.3

200

(1 +

200

1.718

20

100

) 2

+

200

(1 +

20

100

) 3

3. A man borrows a certain sum of money and pays it back in 2 years in two equal installments. If C.I.

is reckoned at 5% per annum and he pays back annually Rs. 441, what sum did he borrow?

a. Rs. 820

b. Rs. 800

c. Rs. 882

d. Rs. 850

Explanation:

Money borrowed which becomes Rs. 441 after one year =

Money borrowed which become Rs. 441 after two years =

Total money borrowed = Rs. 820.

441

(1 +

5

100

441

)

(1 +

5

100

)

 441 × ( 20 ) = 420 = 21 441 × ( 20 ) 2 = 21 = 400

4. A man borrows Rs. 2100 and undertakes to pay back with compound interest @ 10% p.a. in 2 equal

yearly installments at the end of ﬁrst and second year. What is the amount of each installment?

a. 1200

b. 1210

c. 1300

d. 1310

Let the installment be

The value of ﬁrst installment before 1 year =

x .

x 10x

=

11

(1 +

10

100

)

The value of second installment before 2 years =

x

( 1 +

10

100

) 2

100x

=

121

The sum of the above values should equal to principal.

 10x 100x ⇒ 11 + 121 = 2100 110x + 100x ⇒ = 2100 121 210x ⇒ 121 = 2100 ⇒ x = 1210

Alternative method:

The value of the principal after 2 years = The value of 1st installment after 1 year + the value of 2nd installment.

⇒ 2100(1 +

2100 (

2100 (

121

100

121

100

10

) 2

=

11

10

21x

10

100

) = x (

) =

x = 1210

x (1 +

) + x

10

100

) + x

Alternative method:

Here, (1 + r) = 1 +

1

10

=

11

10

10

11

Ratio of principals of two installments = 1 :

Sum of ratios = 11 + 10 = 21

Therefore, Principal of ﬁrst instalment = 2100 ×

Therefore, Instalment = Principal of ﬁrst instalment × (1 + r)

= 11 : 10

11

21

= Rs. 1100

 11 = 1100 × 10 = Rs. 1210

5. A man borrows Rs. 820 and undertakes to pay back with compound interest @ 5% p.a. in 2 equal yearly installments at the end of ﬁrst and second year. What is the amount of each installment?

a. 400

b. 420

c. 441

d. 410

Explanation:

The value of 820 after two years = The value of the installment after 1 year + The value of second installment

820( 1 +

5

100

) 2

=

x (1 +

441

21

⇒ =

400

⇒ 820 × (

441

400

820 ×

20

) =

x + x

41

20

x

x = 441

5

100

)

+

x

Alternative Method:

Here, (1 + r) = 1 +

1

20

=

21

20

20

21

Ratio of principals of two instalments = 1 :

Sum of ratios = 21 + 20 = 41

Therefore, Principal of ﬁrst installment =

= 21 : 20

21

41

× 820 = Rs. 420

Therefore, Installment = Principal of ﬁrst installment × (1 + r) = 420 ×

21

20

= Rs. 441

6. A man borrows Rs. 1820 and undertakes to pay back with compound interest @ 20% p.a. in 3 equal

yearly installments at the end of ﬁrst, second and third years. What is the amount of each installment?

a. 864

b. 850

c. 820

d. 900

The value of 1820 after three years = The value of the ﬁrst installment after 2 years + The value of second installment after 1 year + the value of the third installment

⇒ 1820(1 +

20

100

) 3

=

x(1 +

20

100

) 2

+

x (1 +

⇒ 1820 (

⇒ 1820 (

216

125

216

125

216

125

)

)

=

=

x (

x (

36

5

36 + 30 + 25

6

25

) + x (

91

25

)

25

) = x (

1820 (

) + x

)

x = 864

20

100

) + x

Alternative Method:

Here, (1 + r) = 1 +

1

5

=

6

5

5

6

: (

5

6

2

Ratio of principals for three years = 1 :

6

2

: 6 × 5 :

5

2

=

= 36 : 30 : 25

Sum of the ratios = 36 + 30 + 25 = 91

(On multiplying each ratio by

6

)

) 2

Therefore, Principal of ﬁrst installment =

36

91

× 1820 = Rs. 720

Therefore, Installment = Principal of ﬁrst installment × (1 + r) = 720 ×

6

5

= Rs. 864 General Discussion On EMI's:

Suppose you have taken a loan of Rs.100000 to buy a house at 12% rate to be paid EMI's for 60 months.

They use this formula EMI =

P

× r × (1 + r) n

(1 + r) n − 1

Here r = Rate / 1200

n = periods (5 years = 60 periods)

Sample Loan Schedule:

CarWale EMI Schedule

Following Schedule Is For : 100000 to repay in 60 months. All calculations are based on EMI in Arrears(i.e. Rear Ended EMI's).

 EMI Number EMI Amount Interest Amount Principal Reduction Balance Due 1. Rs.2224 Rs.1000 Rs.1224 Rs.98776 2. Rs.2224 Rs.988 Rs.1237 Rs.97539 3. Rs.2224 Rs.975 Rs.1249 Rs.96290 4. Rs.2224 Rs.963 Rs.1262 Rs.95028 5. Rs.2224 Rs.950 Rs.1274 Rs.93754

Monthly interest is 1% per month. Now after 1 month, interest accrued is 1000. Of the total EMI of Rs.2224, Rs.1000 used for interest and the remaining Rs.1224 for principal reduction. Now Balance of Rs.98776 becomes the principal for next month. So interest is 987.7 or Rs.988. Aptitude 1

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Join the discussion… a person take a lone of rs 6000 for 3 years at 5 per annum CI. he repaid 2100 in each of 1st 2 years. the amount he should pay at the end of 3rd year to clear all his debt is

1. 2425.50

2. 2552.50

3. 2635.50

4. 2745.50 Ramakrishna Salagrama
> Ananya
a month ago
Amount to be paid at the end of the ﬁrst year = 6000*1.05 = 6300
Installment paid = 2100.
Remaining amount = 6300 - 2100 = 4200
Amount to be paid at the end of second year = 4200*1.05 = 4410
Installment paid = 2100
Remaining amount = 4410 - 2100 = 2310
Therefore, Amount to be paid at the end of third year = 2310*1.05 = 2425.50
Ananya
> Ramakrishna Salagrama
a month ago
thanks year.The ﬁrst instalments is half of the second instalment and second instalment is two third of the third instalment. If the rate of interset is 10 % per annum compounded annually. Find the ﬁrst instalment?

1. 2000

2. 4000

3. 5000

4. 6000

5. 6500

△ ▽ Let the third installment is 300x, then second installment = 200x, and ﬁrst one is 100x Amount due after 1 year = 12820*1.1 = 14102 Principal after 1 year = 14102 - 100x Amount due after 2 years = (14102 - 100x)*1.1 = 15512.2 - 110x Principal after 2 years = 15512.2 - 110x - 200x = 15512.2 - 310x Amount after 3 years = (15512.2 - 310x)*1.1 = 17063.42 - 341x But this amount is cleared with third installment. So, 17063.42 - 341x = 300x Solving, x = 26.62 Therefore, First installment = 26.62*100 = 2662

△ ▽ S.I. and C.I. for 2 years are 800 and 820 respectively. What are Principal and rate?

△ ▽ Principal is 8000 and rate of interest is 5% diff b/w ci and si is P(R/100)^2 simple interest is = P*N*R / 100 there n= 2 substitute values we got PR^2 = 200000 and PR = 4000 divide both we got R = 5%

△ ▽ △ ▽ (a) simple interest ? (b) Compound Interest?

g ,

y

p.

.

The answer for part (a) is there in your website. So I need the solution for part

(b) only Shubham Patni
> gautam verma
9 months ago
The answer for part (a) is ₹740
The answer for part (b) is ₹777.
△ ▽
gautam verma
> Shubham Patni
9 months ago
Could you please explain the steps you have followed to reach the answer.
△ ▽
Shubham Patni
> gautam verma
9 months ago
△ ▽
Ramakrishna Salagrama
> gautam verma
2 years ago
Here Debt means which includes interest also. As the interest in Si and Ci cases are different, this
question can be solved in only Simple Interest case as the total debt is given.
△ ▽
gautam verma
> Ramakrishna Salagrama
2 years ago
I have solved the problem as below:
Let the instalment be Rs x.
2360 = x + x(1+12/100) + x(1+12/100)^2 + x(1+12/100)^3
Am I solving it correctly? Because my answer differs from that of the author of a book.
△ ▽ 