Hinglish

Interest and the Magic of Compounding

Class 7 Social Science · Chapter 20: Banks and the Magic of Finance · NCERT Exploring Society: India and Beyond section 20.2

Learn

Interest is the extra money paid for using money, usually given as a percentage. Ishaan deposits ₹1,000 at 6% a year. After one year: ₹1,000 + 6% of ₹1,000 = ₹1,000 + ₹60 = ₹1,060. In the second year he earns 6% on ₹1,060, which is ₹63.60, giving ₹1,123.60. Earning interest on earlier interest is compounding. Left for 12 years, his ₹1,000 grows to about ₹2,012.

A Kerala tale shows the power of doubling. A king of Ambalappuzha lost a chess game to a sage, who asked for one grain of rice on the first square, two on the second, four on the third, doubling across all 64 squares. The 8th square needed 128 grains, the 16th 32,768, and the 32nd over 210 crore: small amounts that keep multiplying become enormous. Banks pay lower interest on deposits and charge higher interest on loans; the difference is their income. If a bank pays 2% on ₹200 (₹4) and lends it at 5% (₹10), it earns ₹6.

Explore: simple doubling.

  1. Sort each amount.

Remember

  • Interest rewards saving; compounding earns interest on interest, so money grows faster over time.
  • Banks earn from the gap between loan and deposit interest rates.

Quick check

₹1,000 at 6% a year, compounded, after 2 years is …

  1. ₹1,123.60
  2. ₹1,120
  3. ₹1,060
  4. ₹1,200
Answer

₹1,123.60. Simple interest would give ₹1,120; compounding adds ₹3.60 more.

Think about it

Is compounding good or bad for a borrower? Why?

One answer

Bad if the loan is not repaid quickly: unpaid interest also earns interest, so the debt can grow fast, which is why borrowing carefully matters.

Practice

Practise with fresh questions at three levels (easy, medium, hard), some answered hands-on, with hints and worked answers. Get 4 of your last 5 right to finish the topic.