Compound and simple interests on a sum over two years are Rs.11730 and Rs.10200 respectively. Determine the principal.
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Answer: B. Rs.17000
Explanation
Simple interest for one year is half of the total simple interest accrued over two years. The difference between compound and simple interest over two years represents the interest earned on the first year interest. Dividing this difference by the annual simple interest determines the exact annual percentage rate leading to the principal. Simple interest is calculated solely on the original principal amount for every time period. Compound interest calculates earnings on both the initial principal and previously accumulated interest amounts. The two year interest discrepancy is a standard algebraic shortcut for finding unknown principal sums.
Banking institutions use compound interest formulas for standard savings accounts and long term loans. Financial planners calculate interest differences to show clients the long term cost of borrowing money. Investment analysts evaluate borrowing costs to advise corporations on optimal capital structure strategies. Option A overestimates the required principal amount based on an incorrect interest rate calculation. Option C incorrectly assumes a higher principal value that fails the two year interest test. Option D suggests a principal sum that yields mismatched compound and simple interest totals.
- Subject
- Mathematics
- Category
- Mathematics
- Topic
- —
- Difficulty
- medium
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