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Question

Shalini deposited ₹4,00,000 in a bank where she was promised an interest of 10%. She deposited it for a period of two years. Find the difference in the amount if the interest is calculated in a compounded manner to the amount interested in a simple manner.

A

4000

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B

500

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C

1000

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D

2000

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Solution

The correct option is A ₹4000 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, 10100×400000=40,000 ₹40,000 added to ₹4,00000 would be the new principal for the next year i.e. 4,40,000. The interest for the second year is calculated on the new principal amount: 10100×440000×1=44,000 So, the final amount after 2 years(compounded annually with 10% interest) = ₹440000 + 44000 = ₹4,84,000. If the principal would have been deposited for an annual simple interest for 10% for a period of two years would be 10100×400000×2=80,000 Therefore amount = ₹4,00000 + ₹80,000 = ₹4,80,000. So, compound interest is ₹4,000 more than a simple interest for a period of two years.

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