On a certain sum, the simple interest for 2 years is ₹1,550 and the compound interest for 2 years at the same rate is ₹1,581. What is the rate of interest?

💡 Solution & Explanation

Simple interest for one year = ₹1,550 ÷ 2 = ₹775. Compound interest is higher only because, in year 2, interest is also earned on year 1's interest: ₹1,581 − ₹1,550 = ₹31. That extra is the year-2 interest on ₹775, so the rate = 31 ÷ 775 × 100 = 4%. The principal is then ₹775 × 100 ÷ 4 = ₹19,375.