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Simple Interest on a sum at 4% per annum for 2 years is 80. The compound interest on the same sum for the same period is_________?

Correct answer: A. Rs. 81.60

  • A. Rs. 81.60
  • B. Rs. 160
  • C. Rs. 1081.60
  • D. None of these

Explanation

Simple interest Rs.80 = P x 4% x 2 years, so P = Rs.80 ÷ 0.08 = Rs.1,000. The compound interest for 2 years is Rs.1,000[(1.04)^2 - 1] = Rs.1,000 x 0.0816 = Rs.81.60. The likely wrong choice is Rs.160, which doubles the simple interest but ignores that compound interest is calculated on the increasing balance.

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