CAT Practice : Percents, Profits

Compound Interest is interest generated on both interest and principal.

SICI

Q.18: Ram deposits Rs. P with a bank at r% compound interest and sees it reach Rs.16P in 20 years. If he had invested the same amount at r% simple interest for 20 years, what would be the amount?
1. 5 %
2. 20%
3. 30%
4. 10%

Choice D. 10%

Detailed Solution

Given, Interest on a simple interest basis is 600 for two years => Interest for one year is equal to Rs 300.

If Ram invests the amount on a compound interest basis – then interest for the first year is the same as investing in simple interest basis and that is equal to Rs 300.

Now, for CI we calculate interest on interest earned in previous time periods, whereas SI is computed purely on the principal invested.

So, CI for second year is 630 – 300 = 330 and Rs30 is the interest earned on interest of 300 which amounts to 10%. Therefore, rate of interest = 10%.

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