On a certain sum, the simple interest for 2 years is ₹2,500 and the compound interest for 2 years at the same rate is ₹2,600. What is the rate of interest?

💡 Solution & Explanation

Simple interest for one year = ₹2,500 ÷ 2 = ₹1,250. Compound interest is higher only because, in year 2, interest is also earned on year 1's interest: ₹2,600 − ₹2,500 = ₹100. That extra is the year-2 interest on ₹1,250, so the rate = 100 ÷ 1,250 × 100 = 8%. The principal is then ₹1,250 × 100 ÷ 8 = ₹15,625.