Mukund deposited ₹57,000 in a bank. With annual compounding, how much compound interest (in ₹) will he earn in 2 years if the interest rate is 10% per annum in the first year and increases by 3% per annum in the second year?
- AOption (a)
13651
- BOption (b)
13851
- COption (c)
13501
- DOption (d)
14101
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Correct answer
13851
Why this answer is correct
Shortcut Trick
Using the Effective Rate Method for successive years:
Effective Rate = R1 + R2 + (R1 × R2) ÷ 100
Effective Rate = 10 + 13 + (10 × 13) ÷ 100 = 24.3%
Compound Interest (CI) = 24.3% of ₹57,000
CI = (24.3 ÷ 100) × 57000 = 243 × 57 = 13851
∴ The correct answer is ₹13851.
Alternate Method
Given:
Principal (P) = ₹57,000
Rate for 1st year (R1) = 10% per annum
Rate for 2nd year (R2) = 10% + 3% = 13% per annum
Formula Used:
Amount (A) = P × (1 + R1÷100) × (1 + R2÷100)
Compound Interest (CI) = A − P
Principal End of Year 1 End of Year 2 ₹57,000 ₹62,700 ₹70,851 +10% +13% Total CI = ₹70,851 − ₹57,000 = ₹13,851
Calculations:
⇒ A = 57000 × (1 + 10÷100) × (1 + 13÷100)
⇒ A = 57000 × (110÷100) × (113÷100)
⇒ A = 57000 × (11÷10) × (113÷100)
⇒ A = 57 × 11 × 113
⇒ A = 627 × 113
⇒ A = ₹70,851
⇒ CI = A − P
⇒ CI = 70851 − 57000 = ₹13,851
∴ The correct answer is ₹13851.
Additional Information
Effective Rate Method for Successive Years
When the interest rates are different for two years (R1 and R2), the combined effective interest rate is given by the formula: Effective Rate = R1 + R2 + (R1 × R2)÷100.
Successive Percentage Change
Compound interest is essentially successive percentage increases applied one after the other. For principal P, the total amount after 2 years simplifies to P × (100+R1)÷100 × (100+R2)÷100.
Simple Interest vs Compound Interest
Simple Interest (SI) is calculated strictly on the initial principal. Compound Interest (CI) is calculated on both the principal and the accumulated interest from the previous periods, resulting in exponential growth over time.