Question

Compound Interest

You borrow 1,000,000 for one year from a friend at an interest rate of 1% per month instead of taking a loan from a bank at a rate of 13% per year. Compare how much money you will save or lose on the transaction.

Answer 1

SOLUTION:-

CASE 1) WHEN LOAN TAKING FROM THE FRIEND :-

A = P ( 1 + r /n )^n*t

Where A = Total amount.

P = Principal = 1,000,000

r = 1% = 0.01

n = number of times compounded per year = 12

A= 1,000,000 (1 + 0.01 / 12)^12*1

A = 1,000,000 (1.000833)¹²

A = 1,000,000 * 1.010042

A = 1010042

Interest = A - P

Interest = 1010042 - 1,000,000

Interest = 10042

CASE:-2) WHEN LOAN TAKEN FROM BANK

A = P (1+ r / n)^n*t

Where P = 1,000,000

r = 13% = 0.13

n = 1

t = 1 year

A = 1,000,000 (1 + 0.13 / 1)^1*1

A = 1,000,000 (1.13)¹

A = 1,000,000 * 1.13

A = 1130000

Interest = A - P

Interest = 1130000 - 1,000,000

Interest = 130000

Thus, we save more money when loan is taken from friend and the amount saved = (130000 - 10042) = 119958