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For the same principal, rate and a period of one year, compound interest compounded annually is:
AAlways greater than simple interest
BAlways less than simple interest
CEqual to simple interest
DExactly double the simple interest
Answer & Solution
Correct answer: C. Equal to simple interest
1. Compounding only bites when interest is charged on interest already added.
2. Over a single year no interest has yet been added to the principal.
3. So the base for the whole year is the original principal in both methods.
4. The two therefore give the same figure at the end of one year.
5. From the second year onward, compound interest pulls ahead because the base has grown.
_Source: NCERT Class 8 Maths, Ch 7 'Comparing Quantities', S7.4 Compound Interest_
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