If simple interest on ₹2000 for 2 years is ₹400, find rate.

Understanding Simple Interest Calculations: A Step-by-Step Guide

Ever wondered how your savings account earns interest or how much you'll pay back on a simple loan? The answer lies in understanding simple interest. Simple interest is a crucial concept in finance, applicable to various situations from daily savings to larger investments. Let's dive into a problem to grasp its essence. If you deposit ₹2000 and after 2 years earn ₹400 in simple interest, what's the interest rate?

Understanding the Simple Interest Formula

The simple interest formula is fundamental to solving interest-related problems. It's expressed as: SI = (P × R × T) / 100

Here:

  • SI represents the Simple Interest earned.
  • P represents the Principal amount (the initial amount invested or borrowed).
  • R represents the Rate of interest per annum (per year).
  • T represents the Time in years.

Let's say you invest ₹1000 at 5% interest for 1 year. Using the formula: SI = (1000 × 5 × 1) / 100 = ₹50. You'd earn ₹50 in simple interest.

Solving the Problem Step-by-Step

Now let's solve our problem: We know that simple interest (SI) is ₹400, the principal (P) is ₹2000, and the time (T) is 2 years. We need to find R (the rate of interest).

Step 1: Identify the known values.

  • SI = ₹400
  • P = ₹2000
  • T = 2 years

Step 2: Substitute the values into the formula.

400 = (2000 × R × 2) / 100

Step 3: Simplify the equation.

400 = 40R

Step 4: Calculate the rate (R).

R = 400 / 40 = 10

Therefore, the interest rate is 10% per annum.

Verifying the Solution

Let's verify our answer by substituting R = 10% back into the formula:

SI = (2000 × 10 × 2) / 100 = ₹400

This matches the given simple interest, confirming our calculation is correct.

Real-World Applications of Simple Interest

Simple interest calculations are used in many everyday scenarios. This includes calculating interest earned on savings accounts (though many accounts use compound interest), short-term loans, and basic investment schemes. Understanding simple interest helps you make informed financial decisions.

Conclusion

We successfully calculated the interest rate in our problem. Mastering simple interest is crucial for anyone managing personal finances. Practice more examples to strengthen your understanding and become more confident in your calculations.


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