Understanding Simple Interest: A Case Study on Rs. 7900 at 8% Annual Rate for 10 Months

Simple interest is a fundamental concept in finance that is widely used in various scenarios, such as loans, savings, and investments. In this article, we will explore the calculation of simple interest using a specific example: a Rs. 7900 loan at an 8% annual interest rate for a period of 10 months. We will break down the formula, the steps involved, and provide a detailed solution to illustrate how simple interest works.

The Concept of Simple Interest

Simple interest is a type of interest that is calculated as a percentage of the principal amount. The principal amount is the initial sum of money that is borrowed or invested. The interest is calculated based on the principal amount, the interest rate, and the time period over which the interest is applied. The formula for simple interest is:

Simple Interest (SI) (Principal (P) x Rate (R) x Time (T)) / 100

Case Study: Rs. 7900 at 8% Annual Rate for 10 Months

Let's use the provided details to calculate the simple interest for Rs. 7900 at an 8% annual rate for 10 months. Here are the details:

Principal (P) Rs. 7900 Rate (R) 8% (annual rate) Time (T) 10 months (which is 10/12 or 5/6 of a year)

Step-by-Step Calculation

Now, let's use the formula to calculate the simple interest:

SI (P x R x T) / 100

Substitute the values into the formula:

SI (7900 x 8 x 5/6) / 100

First, calculate the numerator:

Numerator 7900 x 8 x 5/6 31,600 x 5/6 26,333.33

Then, divide the numerator by 100:

SI 26,333.33 / 100 Rs. 263.33 (rounded off to one decimal place)

To verify the result, let's compute it step by step using a calculator:

Calculate 7900 x 8 63,200 Calculate 63,200 x 5 316,000 Divide 316,000 by 12 26,333.33 Divide 26,333.33 by 100 263.33

Therefore, the simple interest on Rs. 7900 at an 8% annual rate for 10 months is Rs. 263.33.

Interpreting the Result

The calculated simple interest of Rs. 263.33 for a Rs. 7900 loan at an 8% annual rate for 10 months means that the person who borrowed the money will have to pay an additional Rs. 263.33 as interest on top of the principal amount. This is a basic but crucial concept in understanding the cost of borrowing money.

Conclusion

In conclusion, understanding the concept of simple interest is essential for managing personal finances and making informed financial decisions. The case study on Rs. 7900 at an 8% annual rate for 10 months provides a practical example of how to calculate simple interest. This knowledge can be applied to various scenarios, including home loans, car loans, and personal loans, helping individuals to avoid unnecessary financial burdens.

Related Keywords

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Further Reading

For more detailed information on financial concepts and calculations, visit Investopedia or check out finance books and online courses that cover basic to advanced financial concepts.