• Compound interest is the interest earned on the initial principal and previously accumulated interest.
• It is calculated as the sum of the initial principal and the accumulated interest from previous periods.
• Interest is usually applied at regular intervals, such as annually, semi-annually, quarterly, or monthly. • Compound Interest Formula: A=P(1+r/n)^nt
• Where, A = Accrued Amount (principal + interest) P = Principal Amount r = Rate of Interest n = Number of times the interest is compounded per year t = Time in years
• Given: Ratio of Amount after 3 years and 2 years = 21:20
• To calculate the rate of interest (r) Step 1: We need to calculate the Accrued Amount (A) after 3 years and 2 years separately.
• A = P(1+r/n)^nt
• P = 1 (any value) t = 3 and 2 n = 1 (any value)
• Substituting the values in the equation, Accrued Amount (A) after 3 years = P(1+r/n)^3 Accrued Amount (A) after 2 years = P(1+r/n)^2
• Since we need to calculate the rate of interest (r), we will equate the ratio of Accrued Amount (A) after 3 years and 2 years to the given ratio. 21:20 = P(1+r/n)^3 : P(1+r/n)^2 Step 2:
• After simplifying the equation, 2.1 = (1+r/n)^3 : (1+r/n)^2 Step 3:
• Taking the log on both sides of the equation, • ln 2.1 = ln [ (1+r/n)^3 : (1+r/n)^2 ]
• ln 2.1 = 3 ln (1+r/n) – 2 ln (1+r/n)
• ln 2.1 = ln (1+r/n)
• r/n = 2.1 – 1
• r = (2.1 – 1) x n
• Since n = 1
• r = 2.1 – 1
• r = 1.1
• Hence, rate of interest (r) = 1.1 x 100
• Rate of interest (r) = 5% Hence, the rate of interest is 5%.
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