KSh 100,000 is invested for 2 years at 10% per annum compound interest, compounded annually. What is the compound interest earned?
Answer and explanation
Correct answer: C. KSh 21,000
- Step 1: Amount = P(1 + r/100)^n = 100,000 x (1.1)^2 = 121,000. Step 2. Compound interest = amount - principal = 121,000 - 100,000 = KSh 21,000. Answer: KSh 21,000. Why not the others: KSh 20,000: That is the simple interest, which ignores interest on interest. KSh 121,000: That is the final amount, including the original sum. KSh 2,000,000: That is the interest multiplied out without dividing by 100.
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