Shortcut Trick
Total interest to be paid (SI) for 3 years @ 10% = 10% × 3 = 30%
Total interest to be earned (CI) for 2 years (from end of year 1 to 3) @ 10% = 10 + 10 + (10 × 10) ÷ 100 = 21%
Net loss percentage = Interest Paid % − Interest Earned % = 30% − 21% = 9%
Loss amount = 9% of Rs. 40,000 = 40,000 × 0.09 = Rs. 3,600
∴ The correct answer is Rs. 3,600.
Alternate Method
Given:
Principal amount (P) = Rs. 40,000
Rate of interest (R) = 10% p.a.
Time for borrowing (T1) = 3 years (from Year 0 to Year 3)
Time for lending (T2) = 2 years (from Year 1 to Year 3)
Formula Used:
Simple Interest (SI) = (P × R × T) ÷ 100
Compound Interest (CI) = P × [(1 + R ÷ 100)T − 1]
Calculations:
⇒ Interest to be paid (SI) = (40,000 × 10 × 3) ÷ 100
⇒ SI = 40,000 × 0.30 = Rs. 12,000
⇒ Interest to be earned (CI) = 40,000 × [(1 + 10 ÷ 100)2 − 1]
⇒ CI = 40,000 × [(1.1)2 − 1] = 40,000 × [1.21 − 1]
⇒ CI = 40,000 × 0.21 = Rs. 8,400
⇒ Net Profit/Loss = Interest Earned − Interest Paid
⇒ Net Result = 8,400 − 12,000 = −Rs. 3,600
⇒ A negative result indicates a Loss.
∴ The correct answer is Rs. 3,600.
Additional Information
Effective Interest Rate
For Compound Interest over 2 years, the effective rate is given by Reff = x + y + (x × y) ÷ 100, where x and y are rates for the first and second years.
Difference between SI and CI
For the same principal and rate over 2 years, the difference is CI − SI = P(R ÷ 100)2. This rule only applies when the time period and principal are identical for both.
Compound Interest for 'n' years
The amount A in CI is P(1 + r/n)nt. When compounded annually, n = 1, so A = P(1 + r)t.