Fill in the blanks:
(i) The money borrowed (lent or invested) is called .....
(ii) The additional money paid by the borrower to the moneylender in lieu of the money used is called ......
(iii) In simple interest, the principal ..... for the whole loan period.
(iv) In compound interest the ..... goes on changing every conversion period.
(v) The time after which the interest is added each time to form a new principal is called ......
(vi) If the interest is compounded semi-annually, then semi-annually rate is ..... of annual rate.
Answer
(i) The money borrowed (lent or invested) is called principal.
(ii) The additional money paid by the borrower to the moneylender in lieu of the money used is called interest.
(iii) In simple interest, the principal remains constant for the whole loan period.
(iv) In compound interest the principal goes on changing every conversion period.
(v) The time after which the interest is added each time to form a new principal is called conversion period.
(vi) If the interest is compounded semi-annually, then semi-annually rate is half of annual rate.
State whether the following statements are true (T) or false (F):
(i) The interest paid by the banks, post offices, insurance companies is simple interest.
(ii) Compound interest is calculated on the amount of the previous year.
(iii) In compound interest, the principal remains constant for the whole period.
(iv) The time from one specified interest period to the next period is called conversion period.
(v) If the interest is compounded quarterly then there are 2 conversion periods in a year.
Answer
(i) False
Reason — The banks, post offices and insurance companies calculate the interest for one year and then add it to the principal to get the principal for the next year. So, the interest paid by them is compound interest and not simple interest.
(ii) True
Reason — In compound interest, the amount at the end of a year becomes the principal for the next year. So, the interest of a year is calculated on the amount of the previous year.
(iii) False
Reason — In compound interest, the interest of each conversion period is added to the principal to form the new principal. So, the principal goes on changing and does not remain constant.
(iv) True
Reason — The time from one specified interest period to the next period, i.e., the period after which the interest is added to the principal, is called conversion period.
(v) False
Reason — If the interest is compounded quarterly, the interest is added after every three months. So, there are 4 conversion periods in a year and not 2.