Find the compound interest on ₹5000 for 2 years at 4% p.a.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 408
At compound interest, the interest of the first year also earns interest in the second year. The amount is \(P\left(1+\frac{r}{100}\right)^n\), and the compound interest is the amount minus the principal.
Amount \(=5000\times(1.04)^2=5000\times1.0816=5408\)
Compound interest \(=5408-5000=408\), that is, ₹408
Shortcut:
For 2 years, the effective rate is \(\displaystyle 4+4+\frac{4\times4}{100}=8.16\%\)
CI \(=8.16\%\) of 5000 \(=408\)