Multiple choice

A sum is invested at compound interest payable annually. The interest in two successive years, starting from the first year, was Rs. 500 and Rs. 540. The sum is

  1. Rs. 3750

  2. Rs. 5600

  3. Rs. 6250

  4. Rs. 7000

  5. Rs. 7200
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

In compound interest, the interest for the second year is the first year's interest plus interest on that interest. 540 = 500(1 + r). So 1 + r = 540/500 = 1.08. r = 8%. Since 500 is the interest on the principal for one year at 8%, P * 0.08 = 500, P = 500 / 0.08 = 6250.

AI explanation

The difference between the compound interest of the second year and the first year is 540 minus 500, which equals 40. This 40 is the interest earned on the first year's interest of 500, so the rate is (40 / 500) * 100 = 8 percent. Using the simple interest formula Principal = (Interest * 100) / (Rate * Time), the principal is (500 * 100) / (8 * 1) = 6250. The sum is Rs. 6250.

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