Question

Shalini deposited Rs. 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. Rs 4000
• B. Rs 2000
• C. Rs 1000
• D. Rs 500

Answer 1

The correct option is A

Rs 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, 10/100 x 400000 = 40,000, Rs 40,000 added to Rs 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 $\frac{10}{100}\times 440000=44,000$
So, the final amount after 2 years(compounded annually with 10% interest) = Rs 440000 + 44000 = Rs 4,84,000.

If the principal would have been deposited for a an annual simple interest for 10% for a period of two years would be $\frac{10}{100}\times 400000\times 2=80,000$ Therefore amount = Rs 4,00000 + Rs 80,000 = Rs 4,80,000.

So, compound interest is Rs 4,000 more than a simple interest for a period of two years.