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Find the compound interest on ₹5000 for 2 years at 10% per annum, compounded annually.
₹1000
₹1050
₹1100
₹1150
₹1050
Compound interest is calculated on the principal amount and the accumulated interest of previous periods. For ₹5000 at 10% per annum for 2 years, the total amount becomes 5000×(1+10010)2=₹6050, yielding a compound interest of 6050−5000=₹1050.
Compound interest is calculated on the principal amount and the accumulated interest of previous periods. For ₹5000 at 10% per annum for 2 years, the total amount becomes 5000×(1+10010)2=₹6050, yielding a compound interest of 6050−5000=₹1050.
Think of a snowball rolling down a hill, growing larger and gathering more snow faster with every turn.
A=P(1+100R)n — Total Amount under compound interest
CI=A−P — Compound Interest formula
The growth of money follows an exponential pattern where interest earns further interest, unlike simple interest where the interest amount stays constant every period.
Compound interest grows exponentially over time.
The effective principal increases after each compounding period.
Bank fixed deposits and savings accounts
Loan and mortgage calculations
Simple interest for 2 years would be 1005000×10×2=₹1000 (Option A).
Option B (₹1050) includes the extra ₹50 interest earned on the first year's interest.
B is correct — The calculated compound interest using the standard formula is ₹1050.
Always verify whether interest is compounded annually, half-yearly, or quarterly, as it changes the compounding frequency and effective rate.
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