Question

Shalini deposited ₹4,00,000 in a bank where she was promised an interest of 10%. She deposited it for two years. Find the difference between the amounts she would receive in case of interest being compounded annually and simple interest, for the same deposit.

• A. ₹4000
• B. ₹2000
• C. ₹1000
• D. ₹500

Answer 1

The correct option is A

₹4000

Compound Interest:
When a principal is promised with an interest to be compounded annually, the amount after one year becomes the principal for the next year.

So, the amount after first year is
$A=400000(1+\frac{10}{100})=400000\left(\frac{100+10}{100}\right)=400000\left(\frac{110}{100}\right)=440000$

The new principal for the next year will be ₹4,40,000.

So, the amount after second year is
$A=4,40,000(1+\frac{10}{100})=4,40,000\left(\frac{100+10}{100}\right)=4,40,000\left(\frac{110}{100}\right)=4,84,000$

So, the final amount after 2 years(compounded annually with 10% interest) is₹4,84,000.

Simple Interest:

The principal is deposited at an interest rate of 10% per annum.
$\text{Simple interest}=\frac{10}{100}\times 400000\times 2$
= ₹80,000

$\therefore$ Amount = Principal + Simple Interest
= ₹4,00,000 + ₹80,000
= ₹4,80,000
$\therefore$ the required difference is = 4,84,000 - 4,80,000 = ₹4000.

So, the amount that she would receive in case of compound interest is ₹4,000 more than that of simple interest for the period of two years.