Question 1

For a certain principal invested at compound interest, the compound interest for the 3rd year is Rs 125 and for the 4th year is Rs 135. What is the annual rate of interest (in %)?

Accepted Answer

Introduction / Context: Rather than giving the total interest or the total amount, this question provides the compound interest earned in the 3rd year and in the 4th year. It checks whether you understand how yearly compound interest grows geometrically and how successive years' interests are related through the rate of interest. Given Data / Assumptions: Compound interest in the 3rd year = Rs 125. Compound interest in the 4th year = Rs 135. Rate of interest r% per annum, compounded annually. Principal is some unknown sum P. No deposits or withdrawals occur during the period. Concept / Approach: In compound interest, the interest earned in each successive year increases by the same percentage rate. That means the interest in the 4th year equals the interest in the 3rd year multiplied by (1 + r/100). Therefore, by taking the ratio of 4th-year interest to 3rd-year interest, we can directly obtain 1 + r/100 and hence easily find r. Step-by-Step Solution: Step 1: Let I3 be the interest in the 3rd year and I4 be the interest in the 4th year. Step 2: Given I3 = Rs 125 and I4 = Rs 135. Step 3: In compound interest, I4 = I3 * (1 + r/100). Step 4: Therefore, 1 + r/100 = I4 / I3 = 135 / 125. Step 5: Compute the ratio: 135 / 125 = 1.08. Step 6: So 1 + r/100 = 1.08, giving r/100 = 0.08 and r = 8. Verification / Alternative check: If the rate is 8%, each year's interest is multiplied by 1.08. Starting from 125 in the 3rd year, the 4th-year interest should be 125 * 1.08 = 135, which matches the given data. This confirms that r = 8% is consistent. Why Other Options Are Wrong: A rate of 9% would give 125 * 1.09 = 136.25, not 135. 10% would give 125 * 1.10 = 137.5, again not matching the given 135. 12% would produce 125 * 1.12 = 140, clearly not correct. Common Pitfalls: A common mistake is to treat 125 and 135 as interest for the first two years or to try to compute the principal directly, which is unnecessary. Others may incorrectly average the two interest values instead of using their ratio. Final Answer: The annual rate of compound interest is 8%.

Question 2

What is the difference (in rupees) between the compound interest earned in 1 year on a sum of Rs 25,000 at 20% per annum when interest is compounded semi-annually and when it is compounded annually?

Accepted Answer

Introduction / Context: This problem compares the compound interest earned when the same nominal annual rate is compounded with different frequencies: annually versus semi-annually. Although the stated rate is 20% per annum, compounding more frequently leads to a slightly higher effective rate, and the question asks for the difference between the two interest amounts for 1 year. Given Data / Assumptions: Principal P = Rs 25,000. Nominal annual rate r = 20% per annum. Case 1: Interest compounded annually. Case 2: Interest compounded semi-annually (twice a year). Time period = 1 year. Concept / Approach: For annual compounding, we use factor (1 + r/100). For semi-annual compounding, each half-year uses half the rate, r/2, and there are two compounding periods in one year. Hence, the factor becomes (1 + r/(2*100))^2. We calculate the compound amount in each case, subtract the principal to get interest, and then find the difference between the two interests. Step-by-Step Solution: Step 1: Annual compounding: A1 = P * (1 + 20/100) = 25000 * 1.20 = 30000. Step 2: Compound interest for annual case: CI1 = A1 - P = 30000 - 25000 = Rs 5000. Step 3: Semi-annual compounding: Half-yearly rate = 20/2 = 10%. Step 4: Amount after 1 year with semi-annual compounding: A2 = P * (1 + 10/100)^2 = 25000 * (1.10)^2 = 25000 * 1.21 = 30250. Step 5: Compound interest for semi-annual case: CI2 = A2 - P = 30250 - 25000 = Rs 5250. Step 6: Difference in interest: Difference = CI2 - CI1 = 5250 - 5000 = Rs 250. Verification / Alternative check: You can also verify by computing the effective annual rate for semi-annual compounding: (1.10)^2 - 1 = 0.21, or 21%. Thus, effective interest is 21% of 25000, which is 5250, confirming the semi-annual interest figure. Why Other Options Are Wrong: 125, 375, and 500 do not match the precise difference between 21% and 20% of 25000. Those values might occur if the principal or rate were different. Common Pitfalls: One common error is to treat both cases as simple interest, in which case there would be no difference. Another is to use 20% for each half-year instead of 10%, which greatly exaggerates the final amount. Final Answer: The difference between the two compound interest amounts is Rs 250.

Question 3

In how many years will a sum of Rs 2000 yield Rs 662 as compound interest at 10% per annum, if the interest is compounded annually?

Accepted Answer

Introduction / Context: This question asks you to determine the time required for a given principal to earn a specified amount of compound interest at a fixed annual rate. Instead of directly asking for the final amount, the problem gives the interest earned and expects you to find the number of years for which the sum has been invested at compound interest. Given Data / Assumptions: Principal P = Rs 2000. Compound interest CI = Rs 662. Rate of interest r = 10% per annum. Interest is compounded annually. Number of years n is unknown. Concept / Approach: The amount A after n years at compound interest is A = P * (1 + r/100)^n. Since CI = A - P, we have A = P + CI. Using this relation, we can express (1 + r/100)^n as A / P and then solve for n by recognizing powers of 1.1 or by checking integer values systematically. Step-by-Step Solution: Step 1: Compute the total amount after n years: A = P + CI = 2000 + 662 = Rs 2662. Step 2: Write the compound interest formula: A = 2000 * (1.1)^n. Step 3: Set up the equation: 2000 * (1.1)^n = 2662. Step 4: Divide both sides by 2000: (1.1)^n = 2662 / 2000 = 1.331. Step 5: Recognize that 1.1^3 = 1.1 * 1.1 * 1.1 = 1.331. Step 6: Therefore n = 3 years. Verification / Alternative check: Compute the amount for 3 years: A = 2000 * 1.1^3 = 2000 * 1.331 = 2662. Compute CI explicitly: CI = 2662 - 2000 = 662, which matches the given interest value. Why Other Options Are Wrong: For 2 years, factor is 1.1^2 = 1.21, giving A = 2420, CI = 420, which is too small. For 4 or 5 years, the amount would be much larger than 2662, leading to interest amounts much greater than 662. Common Pitfalls: Learners may try to divide the interest evenly by the number of years, which corresponds to simple interest, not compound interest. Others may attempt to solve for n using logarithms without noticing that this is a standard power of 1.1 and can be recognized directly. Final Answer: The sum will yield Rs 662 as compound interest in 3 years.

Question 4

If the compound interest received on a certain amount during the 3rd year is Rs 12,100, what will be the compound interest (in rupees) for the 4th year on the same amount at the same rate, if the annual rate of interest is 9%?

Accepted Answer

Introduction / Context: In this question, you are given the compound interest earned in the 3rd year and asked to compute the compound interest earned in the 4th year at the same rate. The key idea is that in compound interest, each year's interest is increased by the same percentage rate, because interest is calculated on a growing principal. Given Data / Assumptions: Compound interest during the 3rd year = Rs 12,100. Annual rate of interest r = 9%. Interest is compounded annually. Same principal and same rate apply into the 4th year. Concept / Approach: The compound interest earned in successive years follows a geometric progression. Specifically, interest in the (n + 1)th year equals interest in the nth year multiplied by (1 + r/100). Therefore, once we know the interest in the 3rd year and the rate, we can directly get the 4th year interest by multiplying the 3rd year interest by 1.09. Step-by-Step Solution: Step 1: Let I3 be the interest in the 3rd year and I4 be the interest in the 4th year. Step 2: Given I3 = Rs 12,100 and rate r = 9%. Step 3: Relation between consecutive years: I4 = I3 * (1 + r/100). Step 4: Compute 1 + r/100 = 1 + 9/100 = 1.09. Step 5: Calculate I4 = 12,100 * 1.09 = 12,100 + 1089 = Rs 13,189. Verification / Alternative check: You can think of the effective base for the 4th year interest as the amount at the end of the 3rd year, which itself is 9% higher than the amount at the end of the 2nd year. Hence, the 4th year interest is 9% higher than the 3rd year interest, confirming the multiplication by 1.09. Why Other Options Are Wrong: Rs 17,080 and Rs 15,669 are much too high and would require a rate higher than 9% or a different base interest in the 3rd year. Rs 14,376 also does not equal 12,100 * 1.09 and therefore does not represent the correct 4th year interest. Common Pitfalls: Some candidates mistakenly add 9% of the original principal instead of 9% of the 3rd year's base amount, confusing simple and compound interest. Others may attempt to recompute the entire principal unnecessarily, when a simple ratio approach between consecutive years is enough. Final Answer: The compound interest earned in the 4th year will be Rs 13,189.

Question 5

At what annual rate of compound interest (per annum) will a sum of Rs 20,000 amount to Rs 25,088 in 2 years, if interest is compounded annually?

Accepted Answer

Introduction / Context: This question asks you to determine the annual compound interest rate when the principal, final amount, and time period are known. It is another direct application of the compound interest amount formula, where the unknown quantity is the rate of interest per annum. Given Data / Assumptions: Principal P = Rs 20,000. Final amount after 2 years A = Rs 25,088. Time period n = 2 years. Interest is compounded annually at some rate r%. No additional investments or withdrawals occur during this period. Concept / Approach: Using the compound amount formula A = P * (1 + r/100)^n, we can isolate (1 + r/100)^2 as A / P. Taking the square root lets us find 1 + r/100, from which we can easily solve for r. This procedure is an example of reversing the compound interest formula when the final amount is known. Step-by-Step Solution: Step 1: Write the formula: A = P * (1 + r/100)^2. Step 2: Substitute the known values: 25088 = 20000 * (1 + r/100)^2. Step 3: Divide both sides by 20000: (1 + r/100)^2 = 25088 / 20000. Step 4: Compute the ratio: 25088 / 20000 = 1.2544. Step 5: Take the square root of both sides: 1 + r/100 = square root of 1.2544 = 1.12. Step 6: Therefore r/100 = 0.12, which gives r = 12. Verification / Alternative check: Check by recomputing A with r = 12%: A = 20000 * (1.12)^2 = 20000 * 1.2544 = 25,088, exactly the given amount, confirming the correctness of the rate. Why Other Options Are Wrong: 8% would give 20000 * 1.08^2 = 20000 * 1.1664 = 23,328, which is too low. 16% would yield 20000 * 1.16^2 = 20000 * 1.3456 = 26,912, which is too high. 24% is far higher than needed and would overshoot the final amount significantly. Common Pitfalls: Some students attempt to use simple interest formulas or divide the total increase evenly over years, which does not account for compounding. Others forget to take the square root when solving a squared factor, leading to a rate that is either doubled or otherwise incorrect. Final Answer: The required annual rate of compound interest is 12 percent.

Question 6

A bank offers 10% compound interest per half year. A customer deposits Rs 3600 on 1st January and another Rs 3600 on 1st July of the same year. What total amount does the customer gain by way of interest by the end of that year?

Accepted Answer

Introduction / Context: This question involves multiple deposits within the same year under a scheme that pays compound interest per half year. You must calculate the interest earned separately on each deposit because they are invested for different lengths of time, and then add the results to obtain the total interest gained at the end of the year. Given Data / Assumptions: Rate of compound interest = 10% per half year. First deposit = Rs 3600 on 1st January. Second deposit = Rs 3600 on 1st July. Interest is compounded half-yearly. We are interested in the interest amount at the end of the same calendar year. Concept / Approach: For the first deposit, invested on 1st January, there will be two half-yearly compounding periods (January to June and July to December). For the second deposit, placed on 1st July, there will be only one half-yearly compounding period (July to December). We compute the final amount for each deposit using A = P * (1 + r/100)^n and subtract the principal to get the interest. Finally, we add the two interest amounts. Step-by-Step Solution: Step 1: For the 1st deposit of Rs 3600: Number of half-yearly periods n1 = 2, rate per period r = 10%. Step 2: Amount after 2 periods: A1 = 3600 * (1.10)^2 = 3600 * 1.21 = Rs 4356. Step 3: Interest from 1st deposit: I1 = A1 - 3600 = 4356 - 3600 = Rs 756. Step 4: For the 2nd deposit of Rs 3600: Number of periods n2 = 1, same rate 10%. Step 5: Amount after 1 period: A2 = 3600 * 1.10 = Rs 3960. Step 6: Interest from 2nd deposit: I2 = 3960 - 3600 = Rs 360. Step 7: Total interest earned: I_total = I1 + I2 = 756 + 360 = Rs 1116. Verification / Alternative check: You can also compute the combined final amount: 4356 + 3960 = 8316. Total principal invested is 3600 + 3600 = 7200, and 8316 - 7200 = 1116, confirming the total interest. Why Other Options Are Wrong: Rs 2232 is double the correct interest and would correspond to miscounting the periods. Rs 558 or Rs 279 correspond roughly to the interest from just one of the deposits, not both. Common Pitfalls: A typical mistake is to treat the entire Rs 7200 as if it were deposited at the same time or to use a single interest period for both deposits. Another error is to convert the half-yearly rate into an annual rate incorrectly and then apply annual compounding instead of half-yearly compounding. Final Answer: The total interest earned by the customer at the end of the year is Rs 1116.

Question 7

On a certain principal, the simple interest for two years is Rs 2800 and the compound interest for two years is Rs 2996. What is the annual rate of interest?

Accepted Answer

Introduction / Context: This question directly compares simple interest and compound interest on the same principal over the same time period. The difference between the two interests over two years provides a way to calculate the interest on interest, which then helps you to find the annual rate of interest. Given Data / Assumptions: Simple interest (SI) for 2 years = Rs 2800. Compound interest (CI) for 2 years = Rs 2996. Same principal P and same annual rate r are used in both cases. Interest is compounded annually for CI. Time period n = 2 years. Concept / Approach: For 2 years, the difference between CI and SI arises only from the interest earned on the first year's interest during the second year. That extra amount is equal to the interest on the simple interest of one year. Using SI = P * r * 2 / 100 and CI - SI = interest on first year's interest, we can set up equations to find both P and r. However, we only need r, so we can eliminate P using algebra. Step-by-Step Solution: Step 1: Let the annual rate be r% and the principal be P. Step 2: Simple interest for 2 years: SI = P * r * 2 / 100 = 2800, so P * r = 2800 * 100 / 2 = 140000. Step 3: Difference between CI and SI: CI - SI = 2996 - 2800 = 196. Step 4: For 2 years, this difference equals interest on the first year's interest: Difference = (P * r / 100) * r / 100 = P * r^2 / 10000. Step 5: Using P * r = 140000, we have: P * r^2 / 10000 = (140000 * r) / 10000 = 14r. Step 6: So 14r = 196, giving r = 196 / 14 = 14. Verification / Alternative check: Take r = 14%. Then from P * r = 140000, we get P = 140000 / 14 = 10000. Compute SI: SI = 10000 * 14 * 2 / 100 = Rs 2800. Compute CI: A = 10000 * (1.14)^2 = 10000 * 1.2996 = 12996, so CI = 12996 - 10000 = Rs 2996. Both match the given values. Why Other Options Are Wrong: 7 percent or 21 percent do not satisfy both the SI value and the CI difference simultaneously. 28 percent is far too high and would produce very large interest amounts, inconsistent with the given data. Common Pitfalls: Students often confuse the relation between CI and SI and forget that the difference over 2 years comes only from interest on interest in the second year. Misapplying CI formulas or not carefully handling the algebra frequently leads to incorrect rates. Final Answer: The annual rate of interest is 14 percent.

Question 8

There is a 40% increase in an amount in 8 years at simple interest. Using the same rate, what will be the compound interest on Rs 30,000 after 2 years?

Accepted Answer

Introduction / Context: This question first provides information about growth under simple interest and then asks you to apply the same annual rate to a different principal under compound interest. You must begin by extracting the underlying simple interest rate from the long-term increase, and then use that rate to compute a compound interest amount over a shorter period. Given Data / Assumptions: Under simple interest, an amount increases by 40% in 8 years. We must find the equivalent annual rate of interest r%. Then, for a principal of Rs 30,000, we must calculate the compound interest for 2 years at the same rate. Interest for the second part is compounded annually. Concept / Approach: For simple interest, an increase of 40% in 8 years means the total simple interest over 8 years is 40% of the principal. So the rate per year is (40% / 8). Once we know r, we can calculate compound interest on Rs 30,000 for 2 years using CI = P * [(1 + r/100)^2 - 1]. Step-by-Step Solution: Step 1: Simple interest increase of 40% in 8 years means: Total SI = 40% of principal over 8 years. Step 2: Rate per year r = 40 / 8 = 5% per annum. Step 3: Now compute compound interest on Rs 30,000 for 2 years at 5%: CI = P * [(1 + r/100)^2 - 1]. Step 4: Compute the factor: 1 + r/100 = 1 + 5/100 = 1.05. Step 5: Square the factor: 1.05^2 = 1.1025. Step 6: CI = 30000 * (1.1025 - 1) = 30000 * 0.1025 = 3075. Verification / Alternative check: Compute the final amount: A = 30000 * 1.1025 = 33075. Check: CI = A - P = 33075 - 30000 = 3075. This matches the calculated value. Why Other Options Are Wrong: 4612.5 and 6150 would require higher effective rates or longer time periods than given. 7687.5 is much too large and does not correspond to 5% per year for 2 years. Common Pitfalls: One frequent mistake is to treat the 40% as an annual rate rather than an 8-year total increase. Another is to compute simple interest again in the second part, instead of compound interest, which would yield 30000 * 5% * 2 = 3000, slightly different from the correct compound interest. Final Answer: The compound interest on Rs 30,000 after 2 years at the same rate is Rs 3075.

Question 9

A bank offers 5% compound interest per half year. A customer deposits Rs 4800 on 1st January and another Rs 4800 on 1st July of the same year. How much total interest (in rupees) will the customer earn by the end of that year?

Accepted Answer

Introduction / Context: This question is similar to a previous multi-deposit compound interest problem, but with a different rate. It tests whether you can correctly handle deposits made at different times while interest is compounded half-yearly. Each deposit experiences a different number of compounding periods within the year, and you must account for this when computing the total interest. Given Data / Assumptions: Rate of compound interest = 5% per half year. First deposit = Rs 4800 on 1st January. Second deposit = Rs 4800 on 1st July. Interest is compounded half-yearly. We need the total interest by 31st December of the same year. Concept / Approach: The first deposit remains invested for two half-year periods, while the second deposit remains invested for one half-year period. We compute the final amount for each deposit using A = P * (1 + r/100)^n, where r is the half-yearly rate and n is the number of half-yearly periods. Subtracting the original principal from each final amount gives the interest. Then we add all the interest amounts to obtain the total interest. Step-by-Step Solution: Step 1: For the 1st deposit of Rs 4800: Half-yearly rate r = 5%, number of periods n1 = 2. Step 2: Amount after 2 periods: A1 = 4800 * (1.05)^2 = 4800 * 1.1025 = Rs 5292. Step 3: Interest from 1st deposit: I1 = 5292 - 4800 = Rs 492. Step 4: For the 2nd deposit of Rs 4800: Number of periods n2 = 1, same rate 5%. Step 5: Amount after 1 period: A2 = 4800 * 1.05 = Rs 5040. Step 6: Interest from 2nd deposit: I2 = 5040 - 4800 = Rs 240. Step 7: Total interest earned: I_total = I1 + I2 = 492 + 240 = Rs 732. Verification / Alternative check: Total final amount = 5292 + 5040 = 10332. Total principal deposited = 4800 + 4800 = 9600. Interest = 10332 - 9600 = 732, which confirms the calculation. Why Other Options Are Wrong: Rs 1464 is exactly double the correct interest, as if the interest had been miscounted for four half-year periods on both deposits. Rs 366 and Rs 183 represent partial contributions from just one of the deposits and ignore the full investment period or second deposit. Common Pitfalls: Often, students forget that only the first deposit earns interest for two half-yearly periods, while the second earns for just one. Treating both deposits as earning the same number of periods or transforming the half-yearly rate into a rough annual rate without care can lead to wrong answers. Final Answer: The total interest earned by the customer at the end of the year is Rs 732.

Question 10

There is a 40% increase in an amount in 5 years at simple interest. Using the same annual rate, what will be the compound interest (in rupees) on Rs 25,000 after 3 years?

Accepted Answer

Introduction / Context: This question links simple interest and compound interest by using the same annual rate of interest in two separate contexts. First, a 40% increase over 5 years at simple interest is given. From that, you must infer the yearly rate. Then you apply this rate to compute the compound interest on a new principal over 3 years. Given Data / Assumptions: At simple interest, an amount increases by 40% in 5 years. We must find the equivalent annual rate r%. Principal for the compound interest part is Rs 25,000. Time period for compound interest = 3 years. Interest is compounded annually for the second part. Concept / Approach: Under simple interest, a 40% increase over 5 years implies that the total interest is 40% of the principal across the full period. Thus, the simple interest rate per year is 40 / 5 = 8%. Once we have r = 8%, we compute the compound interest using CI = P * [(1 + r/100)^3 - 1] on Rs 25,000 for 3 years. Step-by-Step Solution: Step 1: From simple interest data: Total increase = 40% in 5 years implies r = 40 / 5 = 8% per annum. Step 2: Use compound interest formula for P = 25,000, r = 8%, n = 3 years. Step 3: Compute compound factor: 1 + r/100 = 1 + 8/100 = 1.08. Step 4: Raise the factor to the 3rd power: 1.08^3 = 1.08 * 1.08 * 1.08 = 1.259712. Step 5: Compute the amount: A = 25,000 * 1.259712 = 31,492.8 (rupees). Step 6: Compound interest: CI = A - P = 31,492.8 - 25,000 = Rs 6,492.8. Verification / Alternative check: You can also compute the interest year by year: Year 1 interest = 25,000 * 8% = 2,000, amount = 27,000. Year 2 interest = 27,000 * 8% = 2,160, amount = 29,160. Year 3 interest = 29,160 * 8% = 2,332.8, final amount = 31,492.8, so CI = 6,492.8. Why Other Options Are Wrong: Rs 12,985.6 and Rs 16,232 are too large, as they would correspond to much higher rates or longer periods. Rs 9,739.2 is larger than the actual CI and does not match the detailed step-by-step calculation. Common Pitfalls: Many students forget that the 40% increase is over 5 years, not per year, and incorrectly take r as 40% instead of 8%. Others mistakenly compute simple interest again for 3 years instead of using the compound interest formula, missing the interest-on-interest effect. Final Answer: The compound interest on Rs 25,000 after 3 years at this rate is Rs 6,492.8.

Question 11

There is a 40% increase in an amount in 8 years at simple interest. Using the same rate, what will be the compound interest (in rupees) on Rs 36,000 after 2 years?

Accepted Answer

Introduction / Context: Once again, this question connects simple interest information over a long period with compound interest over a shorter period using the same annual rate. From the given overall increase at simple interest, we first deduce the rate and then apply it to find the compound interest on a new principal over 2 years. Given Data / Assumptions: Under simple interest, an amount increases by 40% in 8 years. We need to find the annual rate r%. Principal for compound interest calculation P = Rs 36,000. Time for compound interest n = 2 years. Interest is compounded annually in the second part. Concept / Approach: A 40% increase in 8 years at simple interest means that total simple interest over 8 years is 40% of the principal. Therefore, the annual simple interest rate is r = 40 / 8 = 5%. We then compute compound interest at 5% per year on Rs 36,000 for 2 years using CI = P * [(1 + r/100)^2 - 1]. Step-by-Step Solution: Step 1: Convert the given increase to an annual simple interest rate: r = 40 / 8 = 5% per annum. Step 2: Compute compound interest on Rs 36,000 for 2 years at 5%. Step 3: Calculate the compound factor: 1 + r/100 = 1 + 5/100 = 1.05. Step 4: Square the factor: 1.05^2 = 1.1025. Step 5: Amount after 2 years: A = 36,000 * 1.1025 = 39,690. Step 6: Compound interest: CI = A - P = 39,690 - 36,000 = Rs 3,690. Verification / Alternative check: You can verify by computing year-wise: Year 1 interest = 36,000 * 5% = 1,800, amount = 37,800. Year 2 interest = 37,800 * 5% = 1,890, final amount = 39,690. CI = 3,690, consistent with the direct formula. Why Other Options Are Wrong: Rs 4,612.5 and Rs 7,687.5 are too high for only 2 years at 5% compound interest. Rs 6,150 would require a much higher rate or more than 2 years of compounding. Common Pitfalls: Some test takers mistakenly use 40% as the annual rate instead of distributing it over 8 years. Others compute the simple interest again for 2 years instead of using the compound interest formula, missing the interest on accumulated interest. Final Answer: The compound interest on Rs 36,000 after 2 years at this rate is Rs 3,690.

Compound Interest Questions