Compound vs Simple Interest – Difference over 2 years: For ₹ 1,250 at 4% per annum, what is the difference between compound interest (annual compounding) and simple interest for 2 years?

Introduction / Context:
For 2 years, the excess of CI over SI equals P * (r^2)/10000 (with r in percent), because CI includes “interest on interest” for the second year.

Given Data / Assumptions:

• P = ₹ 1,250
• r = 4% per annum
• t = 2 years

Concept / Approach:
Difference (CI − SI) for 2 years: P * r^2 / 10000.

Step-by-Step Solution:
Difference = 1250 * (4^2) / 10000= 1250 * 16 / 10000 = 1250 * 0.0016= ₹ 2.00

Verification / Alternative check:
Compute SI = 1250 * 4% * 2 = ₹ 100; CI for 2 years at 4% = 1250[(1.04)^2 − 1] = 1250(0.0816) = ₹ 102; difference = ₹ 2.

Why Other Options Are Wrong:
₹ 3, ₹ 4, ₹ 8 do not match the exact formula outcome.

Common Pitfalls:
Using P * r / 100 again instead of r^2/10000 for the difference or mixing percent and decimal.

Final Answer:
₹ 2