Discussion
Find the compound interest for a sum of ₹5,000 at the rate of 5% per annum for a period of 2 years.
Answer: A
The compound interest is Rs 512.50. The amount is 5000 x 1.05 x 1.05 = 5512.50 so the interest is 5512.50 - 5000 = 512.50. Rs 500 is simple interest for one year, and Rs 510.50, 500.50 and 511.50 do not match the compounding of 5 per cent for two years. The square of 1.05 is 1.1025, so the compound interest rate for two years is 10.25 per cent of Rs 5,000, which is Rs 512.50. Simple interest would be only Rs 500, so the compound interest is larger by the interest earned on the first year's interest, Rs 12.50.
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