Compound interest on a sum for 2 years is Rs. 41 and simple interest is Rs. 40. What is the interest rate percentage?
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Answer: B. 5%
Explanation
The difference between two-year compound and simple interest is the interest on first year interest. Simple interest for one year is 20 rupees, and the interest difference is 1 rupee. Dividing the 1 rupee interest by the 20 rupee base gives an interest rate of 5 percent. Simple interest remains constant for every year of the investment term. Compound interest generates additional earnings on previously accumulated interest amounts. Interest rate equals the interest earned on first-year interest divided by first-year interest.
Comparing compound and simple interest highlights the power of exponential financial growth. Loan agreements often specify compounding frequency which affects total borrowing costs. Financial mathematics uses interest differences to determine unknown annual rates. Choosing 4 percent results from an incorrect ratio calculation of the interest difference. Choosing 6 percent overestimates the rate required to produce a 1 rupee difference. Choosing 8 percent fails to satisfy the two-year compound and simple interest difference.
- Subject
- Mathematics
- Category
- Mathematics
- Topic
- —
- Difficulty
- medium
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