harishbiyani wrote:
Hi,
I am unable to solve the below mentioned question as well not able to understand thr answer that is provided. request members and experts to provide solution.
On what sum will the difference between simple and compound interest for 3 years at 5 percent per annum amount to 12.20?
answer is 1600.
thanks and regards,
harish
Dear Harish,
I'm happy to help.
First of all, I'll say watch the free
Magoosh blog,
https://magoosh.com/gmat/because I just wrote an extensive article on simple & compound interest, with practice questions, and that will go live on the blog in a week or so.
Understand, first of all, that this question is not really a GMAT question as is, because it would require a calculator to solve. If five answer choices were given, we would be able to use backsolving to determine an answer. See:
https://magoosh.com/gmat/2013/backsolving-on-gmat-math/I will just start with the value $1600 and backsolve from this, showing that it works. First, simple interest.
1% of 1600 is $16, so 5% is 5*16 = $80. That's simple interest for one year. In three years, that's 3*80 = $240.
Now, compound interest. The amount will experience a 5% increase three times. The multiplier for a 5% increase is 1.05. For more on percent increases as multipliers, see:
https://magoosh.com/gmat/2012/understand ... -the-gmat/The total amount, principle plus compound interest, after three years is
1600*(1.05)^3 = $1852.20
(I used a calculator for that.)
That's $252.20 in interest. That's a 252.20 - 240 = $12.20 difference between simple & compound interest.
Understand, my friend, it's very very easy to create compound interest questions that only could be solved with a calculator. It's a bit trickier to write high quality compound interest questions that can be solved entirely without a calculator, which are amenable to estimation and backsolving and other approximation methods. The blog that will be release on the
Magoosh blog in a week or so will have a few high quality questions of this sort. Here's another question of that order:
Cindy invests $10000 in an account that pays an annual rate of 3.96%, compounding semi-annually. Approximately how much does she have in her account after two years?
(A) $10079.44
(B) $10815.83
(C) $12652.61
(D) $14232.14
(E) $20598.11Let me know if you would like an explanation of this question.
Mike
_________________
Mike McGarry
Magoosh Test PrepEducation is not the filling of a pail, but the lighting of a fire. — William Butler Yeats (1865 – 1939)