A principal increases by 10% in 2 years at simple interest. At the same rate of interest, what is the compound interest on Rs 13000 for 2 years, compounded annually?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 1332.50
Simple interest grows by the same amount every year, so the yearly rate is the total rise divided by the years. Compound interest then adds interest on the first year’s interest as well.
Rate \(\displaystyle =\frac{10\%}{2}=5\%\) per annum
Amount after 2 years at 5% compound interest \(=13000\times1.05^{2}=13000\times1.1025=\) Rs 14332.50
Compound interest \(=14332.50-13000=\) Rs 1332.50
The compound interest is Rs 1332.50 (simple interest would be Rs 1300; the extra Rs 32.50 is 5% of the first year’s Rs 650).