what is the difference between the compound intrest , when intrest is compoundef 5 monthly and simple intrest on a sum of 12000 for 5/4 year at 12% p.a
Answers
Basics first.
We know there is NO difference between simple interest and compound interest for 1st year if CI is compounded annually.
CI attracts interest on interest on all subsequent years.
Now to the solution :
The difference of 150 is solely due to interest on interest in the second year. This represents 12% simple interest on interest received for first year for 6 months (or 6% in effect).
Therefore, interest for the first year is :
150/6 x 100 = 2500
Now, 2500 must be 12% of the principal amount at the beginning of first year.
Therefore, principal at the beginning of first year is :
P = 2500/12 x 100 = 20833.33
This method is adopted to crack management entrance examinations where time is at premium and application of traditional formulae consumes more time than you can afford to spend. A second look reveal both steps could be combined together and the answer pops into your mind without much ado …
{(150/6 x 100)/12} x 100 = 20833.33
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