If principal amount is P and rate of interest is R% per annum, then what is the difference between simple interest and compound interest for 2 years?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → \(\frac{PR^2}{(100)^2}\)
For the first year, simple interest and compound interest are equal. In the second year compound interest also earns interest on the first year’s interest, and that extra amount is the whole difference.
First year’s interest \(\displaystyle =\frac{PR}{100}\)
Interest on it for one year \(\displaystyle =\frac{PR}{100}\times\frac{R}{100}=\frac{PR^2}{(100)^2}\)