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Calculate the compound interest on Rs. 1000 for 2 years at 10% per annum compounded annually.
200
210
220
190
210
Compound interest is calculated by adding the interest earned in each period to the principal, effectively making the interest earn interest. For Rs. 1000 at 10% for 2 years, the amount after 2 years is 1000├Ч(1+10010тАЛ)2=1210, resulting in an interest of 1210тИТ1000=210.
Compound interest is calculated by adding the interest earned in each period to the principal, effectively making the interest earn interest. For Rs. 1000 at 10% for 2 years, the amount after 2 years is 1000├Ч(1+10010тАЛ)2=1210, resulting in an interest of 1210тИТ1000=210.
Think of compound interest like a snowball rolling down a hill; as it gathers snow (interest) on its outer layers, the snowball gets bigger, allowing it to collect even more snow with each subsequent rotation.
A=P(1+100RтАЛ)n тАФ Formula for the total amount after compound interest
CI=AтИТP тАФ Formula to calculate the compound interest earned
The process follows a geometric progression where the principal increases exponentially over discrete time intervals. Unlike simple interest, which is calculated only on the initial principal, compound interest uses the formula A=P(1+100RтАЛ)n, where A is the final amount, P is the principal, R is the rate, and n is the number of periods. The interest component is derived by subtracting the initial principal from the accumulated amount.
Simple interest remains constant for each period because it is calculated only on the original principal.
Compound interest increases over time as the interest itself is reinvested.
For n=1, simple interest and compound interest yield identical results.
Maximizes returns on investments over long durations.
Accounts for the time value of money.
Increases the debt burden significantly if interest rates are high.
Complex to calculate manually for long time horizons without financial tools.
Banking and savings accounts calculation.
Calculating population growth rates or bacterial culture expansion.
The simple interest for 2 years would be 1001000├Ч10├Ч2тАЛ=200.
Option A (200) represents simple interest, while Option B (210) represents the actual compound interest.
B is correct тАФ The total interest is Rs. 210 because the interest from the first year is added to the principal before calculating the second year's interest.
In competitive exams, always check if the question asks for 'simple' or 'compound' interest; compound interest will always be higher than simple interest for periods greater than one year at positive rates.