A sum of money invested at compound interest amounts to ₹ 400 in 2 years and to ₹ 420 in 3 years. The rate of interest per annum is
The formula for the amount A after t years at compound interest is $A = P(1+r)^t$.
Given:
Amount after 2 years ($A_2$) = ₹ 400
Amount after 3 years ($A_3$) = ₹ 420
So, we have two equations:
1) $400 = P(1+r)^2$
2) $420 = P(1+r)^3$
To find the rate r, divide equation (2) by equation (1):
$\frac{420}{400} = \frac{P(1+r)^3}{P(1+r)^2}$
$\frac{42}{40} = (1+r)^{3-2}$
$\frac{21}{20} = 1+r$
Now, solve for r:
$r = \frac{21}{20} – 1$
$r = \frac{21 – 20}{20}$
$r = \frac{1}{20}$
To express the rate as a percentage, multiply by 100:
Rate = $\frac{1}{20} \times 100\% = 5\%$.
$\frac{A_{t+1}}{A_t} = 1+r$
The interest rate can be calculated as the interest earned in the 3rd year divided by the principal at the beginning of the 3rd year (which is the amount after 2 years).
Interest rate = $\frac{\text{Interest earned in 3rd year}}{\text{Amount after 2 years}} = \frac{20}{400} = \frac{1}{20}$.
As a percentage, this is $\frac{1}{20} \times 100\% = 5\%$. This method is valid only because the time difference is exactly one year.