Test Index

Time Value of Money

Question : 92 of 99

Marks: +1, -0

10 \%

per annum is

Solution:

Concept:

The difference between compound interest (CI) and simple interest (SI) for two years on a principal P at rate r% is given by

P \left( \frac{r}{100} \right)^2

Explanation:

Step 1: Compute SI for 2 years.

SI = \frac{P \times r \times t}{100} = \frac{1000 \times 10 \times 2}{100} = 200

rupees.

Step 2: Compute CI for 2 years.

CI = P\left(1 + \frac{r}{100}\right)^t - P = 1000\left(1 + 0.1\right)^2 - 1000 = 1000(1.21) - 1000 = 210

rupees.

Step 3: Difference =

CI - SI = 210 - 200 = 10

rupees.

Alternatively, using formula: Difference =

1000 \times \left( \frac{10}{100} \right)^2 = 1000 \times (0.1)^2 = 1000 \times 0.01 = 10

Answer:

Rs.10

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