Multiple choice

An investment plan offers a certain rate of interest compounded annually. If the difference between the amount received after 2 years and the principal invested in the investment plan is (21/100) times the principal amount, the rate of interest is

  1. 14%

  2. 12%

  3. 10%

  4. 15%

  5. 20%
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Amount = P(1 + r/100)^2. Difference = Amount - P = P((1 + r/100)^2 - 1) = 0.21P. (1 + r/100)^2 - 1 = 0.21. (1 + r/100)^2 = 1.21. 1 + r/100 = 1.1. r/100 = 0.1, r = 10%.

AI explanation

The difference between the amount and the principal is the compound interest, so the compound interest equals 21 divided by 100 multiplied by the principal. Using the formula for compound interest over two years, this means 1 plus R over 100 squared minus 1 equals 21 divided by 100. Solving for R, we find that 1 plus R over 100 squared equals 1.21, making R over 100 equal to 0.1. Therefore, the rate of interest is 10%.

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