Discussion
If the simple interest on a sum of money for 2 years at 5% per annum is Rs. 50, what is the compound interest on the same at the same rate and for the same time?
Answer: A
\[ A = P\left(1 + \frac{R}{100}\right)^{n}, \qquad \text{CI} = A - P, \qquad \text{SI} = \frac{PRn}{100} \]
Recover the principal from the simple interest.
\[ 50 = \frac{P \times 5 \times 2}{100} = 0.1P \quad\Longrightarrow\quad P = \text{Rs. } 500 \]
\[ \text{CI} = 500\left[(1.05)^{2} - 1\right] = 500(1.1025 - 1) \]
\[ = \text{Rs. } 51.25 \]
The Rs. 1.25 excess is 5% of the first year's Rs. 25 of interest - the only difference compounding makes over two years.
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