The compound interest on ₹2,000 at 5% per annum, compounded yearly for 2 years is:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → ₹205
With interest compounded yearly, the second year’s interest is earned on the principal plus the first year’s interest.
Interest in year 1 \(=5\%\) of 2000 \(=\) ₹100
Interest in year 2 \(=5\%\) of 2100 \(=\) ₹105
Compound interest \(=100+105=\) ₹205
Shortcut:
For 2 years at r%, the compound interest is \(\left(2r+\frac{r^2}{100}\right)\%\) of the principal: \(10.25\%\) of 2000 \(=\) ₹205