Question

What does 12% per annum mean?

Answer 1

Rate of Interest:

The rate of interest per annum is the interest rate over a period of one year. The amount of money at the time of maturity depends on whether the interest is simple or compound. The per annum rate is only applicable to the principal amount.

If the rate of interest is higher, the interest amount is also higher and vice-versa. The simple interest can be calculated by $\mathit{S}\mathit{I}\mathbf{=}\frac{\mathbf{P}\mathbf{R}\mathbf{T}}{\mathbf{100}}$, where $P$ is the principal amount, $R$is the rate of interest, and $T$is the time period. When the rate is $12\%$p.a, The simple interest is $SI=\frac{P\times 12\times 1}{100}$, i.e, $0.12P$

The additional amount to be paid or received at the time of maturity is $12\%$ of the principal amount. Similarly, If the interest is compounded, the amount received at the time of maturity $\mathit{A}\mathbf{=}\mathit{P}{\left(1+\frac{R}{100}\right)}^{\mathbf{T}}$. So, if the rate of interest is $12\%$p.a, the amount received at the time of maturity $A=P{\left(1+\frac{12}{100}\right)}^1$i.e., $1.12P$

Hence $12\%$per annum means the interest earn on $Rs.100$ after $1$year is $Rs.12$.