Q2. Sam invested Rs. 30,000 at 5% per annum on simple interest for 4 years to Shyam. Sam also invested
the same amount, for same duration and same rate of interest to Mohan on compound interest. What
will be the difference of interest received by him in two cases?
1. Rs. 300
2. Rs. 150
3. Rs. 200
4. Rs. 175

 

Difference Between Simple and Compound Interest Calculation

Understanding the difference between simple interest (SI) and compound interest (CI) is crucial for financial and competitive exams like CSIR NET Life Science, IIT JAM, and GATE Biotechnology. This article will explain the concept using a real-world example and highlight the key difference between the two types of interest.

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Problem Statement

Sam invested Rs. 30,000 at 5% per annum for 4 years under two different schemes:

• Simple Interest (with Shyam)
• Compound Interest (with Mohan)

Question:

What is the difference between the interest earned from both cases?

Options:

1. Rs. 300
2. Rs. 150
3. Rs. 200
4. Rs. 175

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Step-by-Step Calculation

1. Simple Interest Calculation

The formula for Simple Interest is:

SI=P×R×T / 100

Where:

• P = Principal amount = Rs. 30,000
• R = Rate of interest = 5%
• T = Time period = 4 years

              SI  =   30,000×5×4 / 100

                SI=600,000/100

                      =6,000

 

2. Compound Interest Calculation

The formula for Compound Interest is:

 

• 3. Difference Between Simple and Compound Interest

  $$\text{Difference}=CI-SI$$ =6,465.19−6,000= 6,465.19 – 6,000=6,465.19−6,000 =465.19= 465.19=465.19

  Since this value does not match the provided options, it’s likely that the question contains a simplification or rounding error. However, the calculation method remains valid for similar problems.

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  Correct Approach and Learning Outcome

  The concept of compound interest includes the effect of interest-on-interest, which increases the total return over time. Simple interest, on the other hand, calculates interest only on the initial principal. Understanding this difference is crucial for exams like CSIR NET Life Science, IIT JAM, GATE Biotechnology, and DBT JRF.

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  Conclusion

  The difference between simple and compound interest lies in the method of calculation and the compounding effect. Mastering these concepts is essential for competitive exams. Join Let’s Talk Academy today to gain a deeper understanding of financial mathematics and more!