Understanding Simple Interest in Financial Transactions
Simple interest is a fundamental concept in finance that is widely used in various financial transactions. It is a straightforward method of calculating the interest on a principal amount over a specified period at a fixed rate. This article explores how simple interest is applied in a specific financial scenario, demonstrating the importance of understanding these calculations.
Problem Explanation
The scenario presented involves three parties: A, B, and C. Party A lends a sum of 5000 at a simple interest rate of 10% for 5 years to party B. Subsequently, party B lends this amount to party C at a rate of 13% for the same period. The goal is to determine the extra amount that party B receives after five years.
Simple Interest Formula
The formula for calculating simple interest is:
Simple Interest (SI) P × N × R / 100
where P is the principal amount, N is the time period in years, and R is the rate of interest per annum.
Calculations
A’s Loan to B
First, we calculate the simple interest that party B incurs from party A:
A’s Simple Interest (SI) 5000 × 5 × 10 / 100 2500
Therefore, the amount B has to pay back to A after 5 years is:
Total Amount B has to pay A Principal Simple Interest 5000 2500 7500 rupees
B’s Loan to C
Next, we calculate the simple interest that party B earns from lending the amount to party C:
B’s Simple Interest (SI) 5000 × 13 × 5 / 100 3250
Therefore, the total amount B gets after 5 years is:
Total Amount B gets from C Principal Simple Interest 5000 3250 8250 rupees
Extra Amount B Receives
The extra amount B receives after five years can be calculated as the difference between the amount B gets from C and the amount B has to pay back to A:
Extra Amount 8250 - 7500 750 rupees
Conclusion
This scenario provides a clear example of how simple interest works in financial transactions. By understanding the calculations involved, one can better manage and assess the financial outcomes of similar transactions.