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# The difference, after two years, between compound interest and simple

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The difference, after two years, between compound interest and simple  [#permalink]

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02 Jul 2017, 01:24
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The difference, after two years, between compound interest and simple interest on a certain sum of money invested at the same rate of interest, is $18. If the simple interest accumulated on the sum after two years is$180, what is the rate of interest at which the sum of money was invested?

(A) 36%
(B) 30%
(C) 25%
(D) 20%
(E) 10%

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The difference, after two years, between compound interest and simple  [#permalink]

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02 Jul 2017, 01:44
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Given data : Compound Interest - Simple Interest(on the same sum of money) = 18$Also, the period of interest : 2 yrs Simple interest accumulated over 2 years = 180$

We know that the simple interest = compound interest(for the first year, for any amount for same rate of interest)
So, the difference in interests would have occurred in the second year.
Simple interest is going to be same for all years for any sum at
a fixed rate of interest
(making the simple interest of year 1 = 90$) Since the compound interest increases by 18$, the rate of interest must be 20%(because 20% of 90 is 18)

Hence, rate of interest : 20%(Option D)

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Re: The difference, after two years, between compound interest and simple  [#permalink]

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02 Jul 2017, 05:49
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In compounding interest, interest earned in year t0 is reinvested for year t1 i.e. interest is earned on interest payments. In simple interest, fixed interest is paid each year (no interest on last year's payment)

==> simple interest each year = 180/2 = 90$As total period is 2 years only, difference between compounding interest payment and simple interest payment arises from the interest earned on 1st year interest under CI. ROI = 18/90 = 1/5 = 20% Ans. is D Retired Moderator Joined: 19 Mar 2014 Posts: 941 Location: India Concentration: Finance, Entrepreneurship GPA: 3.5 Re: The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 03 Jul 2017, 12:04 1 1 This is a very good question. Thanks Bunuel At least I am able to brush up the concepts for SI and CI. Simple Interest For First Year = Compound Interest For the First Year Simple Interest for 2 Years $$= 180$$ Simple Interest Per Year $$= \frac{180}{2}$$ $$= 90$$ Considering the difference between the Compound interest and Simple Interest for the second year $$= 18$$ We know that the compound interest add $$18$$ in the $$90$$amount of the first year. This can give us the interest rate $$= \frac{18}{90} = \frac{6}{30}= \frac{1}{5} = 20%$$ Hence, Anwer is D _________________ "Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent." Best AWA Template: https://gmatclub.com/forum/how-to-get-6-0-awa-my-guide-64327.html#p470475 Intern Joined: 19 Jan 2016 Posts: 36 Re: The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 08 Jul 2017, 00:18 Hi.. can someone explain why are we doing (18/90) ?? As 90 is the simple interest and 18 is the difference between the two interests ?? Senior Manager Joined: 28 Jun 2015 Posts: 292 Concentration: Finance GPA: 3.5 The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 08 Jul 2017, 03:27 SI for 1st year = CI for 1st year = $$90$$. Let CI for the 2nd year = $$x$$. So, $$x - 90 = 18$$ $$x = 108$$. $$90 + 20\%(90) = 108$$, so Ans - D. _________________ I used to think the brain was the most important organ. Then I thought, look what’s telling me that. Intern Joined: 22 Oct 2016 Posts: 22 Re: The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 20 Jul 2017, 05:27 1 anuj11 wrote: Hi.. can someone explain why are we doing (18/90) ?? As 90 is the simple interest and 18 is the difference between the two interests ?? Hi Anuj11, We know SI is 180$ for 2yrs, making it 90$for each year. The difference b/w Simple and Compound interest starts from 2nd year. Hence the interest amount of 2nd year[90$] is compounding, and the difference b/w SI and CI as per the stem is 18$. The question is asking 18$ difference is what % of the interest amount.

18 = (x/100)90
x = (1/5) = 20%

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Re: The difference, after two years, between compound interest and simple  [#permalink]

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27 Sep 2018, 11:32
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Bunuel wrote:
The difference, after two years, between compound interest and simple interest on a certain sum of money invested at the same rate of interest, is $18. If the simple interest accumulated on the sum after two years is$180, what is the rate of interest at which the sum of money was invested?

(A) 36%
(B) 30%
(C) 25%
(D) 20%
(E) 10%

We'll use the underlying logic behind interest to create a simple equation, without bothering with variables.
This is a Logical approach.

The only difference between the compound and simple interest is that the compound interest was calculated twice - once at the end of the first year and once at the end of the second year.
So, the $18 difference must be due to the second year's interest earned from the first year's interest. Since 2 years of simple interest is$180, one year is $90 so 90*rate = 18 meaning that our interest rate is 18/90 = 2/10 = 20% (D) is our answer. Note that understanding the underlying logic created an extremely simple calculation: 18 divided by (180/2), as opposed to something full of variables. _________________ Senior Manager Joined: 15 Oct 2017 Posts: 314 Re: The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 28 Sep 2018, 03:53 1 If simple interest was 180$, that means simple interest must have been 90$per year. So, the difference in 18$ must have ocurred due to the interest in interest, i.e. (90*x)/100 = 18, x = 20%.

IMO D.
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Re: The difference, after two years, between compound interest and simple  [#permalink]

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30 Sep 2018, 10:57
urvashis09

Can you please elaborate the explaination which you mentioned above.

Sure, when you calculate simple interest and compound interest for any given amount, the interest for the first year remains the same. Example, you have 100$on both SI and CI for 2 years @ 10%, for the first year both will earn an interest of 10$. But for the second year, SI will again earn 10$, but CI will earn 11$. Why? because now the amount for CI becomes the amount initially invested plus the interest earned i.e. 100$+ 10$ = 110$. Since the interest earned is not taken out but added in the principal amount invested for CI, the difference starts coming from second year onwards. Hope that helps. Target Test Prep Representative Status: Founder & CEO Affiliations: Target Test Prep Joined: 14 Oct 2015 Posts: 4295 Location: United States (CA) Re: The difference, after two years, between compound interest and simple [#permalink] ### Show Tags 09 Nov 2018, 12:20 Bunuel wrote: The difference, after two years, between compound interest and simple interest on a certain sum of money invested at the same rate of interest, is$18. If the simple interest accumulated on the sum after two years is \$180, what is the rate of interest at which the sum of money was invested?

(A) 36%
(B) 30%
(C) 25%
(D) 20%
(E) 10%

Let’s let P = the principal and r = the interest rate., We use the formula for simple interest: I = P x r x t and the compound interest formula (for annual compounding): I = P x [(1 + r)^t -1], and we have:

P x r x 2 = 180 (from the simple interest formula)

P x [(1 + r)^2 - 1] = 198 (from the compound interest formula for annual compounding

Dividing the first equation by the second equation, we have:

(r x 2)/[(1 + r)^2 - 1]= 180/198

198(r x 2) = 180[(1 + r)^2 - 1]

198(2r) = 180(1 + 2r + r^2 - 1)

396r = 360r + 180r^2

180r^2 - 36r = 0

36r(5r - 1) = 0

r = 0

or

5r - 1 = 0

r = 1/5

Since r can’t be 0, r = 1/5 = 20%.

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Re: The difference, after two years, between compound interest and simple &nbs [#permalink] 09 Nov 2018, 12:20
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# The difference, after two years, between compound interest and simple

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