Multiple choice general knowledge math & puzzles

What is the difference between simple and compound interest on Rs 500 for 2 years at the rate of 5%p.a?

  1. 1.25

  2. 1.5

  3. 2.0

  4. 2.25
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A Correct answer
Explanation

Simple Interest = P×R×T/100 = 500×5×2/100 = Rs 50. Compound Interest = P×(1+R/100)^T - P = 500×(1.05)^2 - 500 = 500×1.1025 - 500 = 551.25 - 500 = Rs 51.25. The difference is 51.25 - 50 = Rs 1.25.

AI explanation

Simple interest for 2 years = (500 × 5 × 2)/100 = Rs 50. Compound interest = 500 × (1.05² − 1) = 500 × 0.1025 = Rs 51.25. The difference between the two is Rs 51.25 − Rs 50 = Rs 1.25. This gap arises because compound interest earns interest-on-interest in the second year, which simple interest never accounts for.

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