CA Foundation · Quantitative Aptitude · Mathematics of Finance
The difference between compound interest (compounded annually) and simple interest on ₹20,000 for 2 years at 10% per annum is:
The difference is ₹200. Simple interest for two years is ₹4,000, while compound interest is 20,000 x (1.1^2 - 1) = ₹4,200. The gap is the interest earned on the first year's interest, which equals principal times rate squared, 20,000 x 0.01 = ₹200.
- A₹200Correct
- B₹400
- C₹2,000
- D₹4,200
Explanation
Simple interest = 20,000 x 10% x 2 = ₹4,000. Compound interest = 20,000 x (1.21 - 1) = ₹4,200. Difference = ₹200, which equals P x r^2 = 20,000 x 0.01. ₹4,200 is the compound interest itself, not the difference.
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