The difference between simple and compound interest on Rs. 5000 over 2 years is Rs. 72. Find the interest rate.
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Answer: B. 12 %
Explanation
The two year interest difference formula relates the principal and interest rate to the variance amount. Substituting the principal and seventy two currency units into the formula isolates the rate squared. Solving the algebraic equation reveals an annual interest rate of twelve percent. Simple interest grows linearly, whereas compound interest grows exponentially over multi year spans. The interest variance formula isolates the compounding effect independent of the simple interest accrued. Percentage rates are converted to decimals when performing algebraic operations in finance.
Lenders analyze interest variances to verify terms on commercial loans and consumer mortgages. Understanding interest rate calculations helps individuals manage personal debt and savings effectively. Financial mathematics provides tools to reverse engineer unknown rates from observed financial data. Option a suggests a ten percent rate which generates a different interest variance total. Option c proposes a six percent rate that is too low to produce seventy two in variance. Option d underestimates the rate required to satisfy the two year compound interest formula.
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- Mathematics
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- Mathematics
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- Difficulty
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