Interest, principal and rate per annum
Money kept in a bank grows by a percentage of itself, for every year.
₹6000 in a bank for a year
A bank says its fixed deposit (FD) pays 10% p.a. You deposit ₹6000 for 1 year.
How much interest will the bank pay you for the year?
What this lesson covers
The idea
Interest is extra money paid on money deposited, or paid by those who borrow; it is calculated on the principal at a rate of interest given as a percentage per annum (p.a.), meaning for every year.
₹6000 in a bank for a year
A bank says its fixed deposit (FD) pays 10% p.a. You deposit ₹6000 for 1 year.
How much interest will the bank pay you for the year?
- ₹600
- ₹60
- ₹6,000
One year of interest
Choose the principal (the money you deposit) and the rate of interest. Watch the interest and the amount in the bank after 1 year.
Interest is a percentage of the principal
Interest is the extra money paid on money deposited (or paid by those who borrow). It is calculated on the principal at a rate of interest given as a percentage per annum (p.a.), which means for every year.
Deposit ₹6000 (the principal) in an FD at 10% p.a. for 1 year. Interest = 10% of 6000 0.10 × 6000 = ₹600 Amount after 1 year: 6000 + 600 = ₹6600
The amount is the principal plus 10% of it, which is 110% of the principal: 6000 × 1.1 = ₹6600
A savings account can pay a lower rate, such as 2.5% p.a. On ₹6000 the interest for a year is 0.025 × 6000 = ₹150.
Notes
Interest is the extra money paid on money deposited (or paid by those who borrow). It is calculated on the principal at a rate of interest given as a percentage per annum (p.a.), which means for every year.
Check yourself
A bank pays 6% p.a. on an FD of ₹5000. How much interest does it pay for 1 year (in ₹)?
Answer: 300
The interest is 6% of the principal. 6/100 × 5000 = ₹300
Aarav deposits ₹8000 in an FD at 5% p.a. How much is in his account after 1 year (in ₹)?
Answer: 8400
Interest = 5% of 8000 = ₹400. Amount = 8000 + 400 = ₹8400.
A bank says 8% p.a. What does p.a. tell you?
The interest on ₹4000 for 1 year is ₹240. What is the rate of interest per annum?
Answer: 6 %
240/4000 × 100 = 6%, so the rate is 6% p.a.
- The 8% rate applies for every year — correct. Yes! p.a. is per annum, which means for every year.
- The 8% is the money you deposit. The money deposited is the principal. The 8% is the rate of interest.
- The interest is a fixed ₹8 each year. The rate is a percentage of the principal, not a fixed number of rupees. It is 8% of the principal for every year.