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What will be interest payable in three years?

There are two ways in which interest may be paid.

(1). You pay interest every year on Rs. 10000 at 8% .

(i) So interest for 1st year = (10000x10)/100 = 1000

(ii) interest for 2nd year = (10000x10)/100 = 1000

(iii) interest for 3rd year = (10000x10)/100 = 1000

Hence total interest you pay for three years = 3000.

(2). (i) You pay interest for 1st year = (10000x10)/100 = 1000

(ii) Now in the 2nd year, you pay interest on Rs 10000 and also on Rs.1000 ,that is, you pay interest on original sum + Interest = interest on 11000. Hence interest for 2nd year = (11000x10)/100 = 1100.

(iii) Now in third year, you pay interest on original sum Rs10000 + interest for 1st years + interest for 2nd year = interest on 10000 + 1000 + 1100 = 12100.

Hence interest for third year = (12100x10)/100 = 1210

Hence total interest = 1000 + 1100 + 1210 = Rs.3310

You will observe that in the first case, equal interest has been paid every year.

In the second case, interest has been charged again on the interest for the previous years in addition to interest on the original sum. This method of computing interest is called compound interest.

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