The question is from CAT Simple and compound interest. CAT exam is known to test on basics rather than high funda ideas. 2IIMs CAT question bank provides you with CAT questions that can help you gear for CAT Exam CAT 2020. Simple Interest and Compound Interest is an important topic for CAT Preparation. In this question, the difference betweeen simple interest and compound interest is being asked. Remember, Compound Interest is interest generated on both interest and principal.
Question 18: Ram earns an interest of 600 over two years on a simple interest basis. On a compound interest basis, at the same interest rate, he would earn Rs. 630. What is the rate of interest?
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%.
The question is "What is the rate of interest?"
10% is the rate of interest.
Choice D is the correct answer.
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