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Identify principal, rate, and time. Simple interest: use P×r×T/100. Example: on $1,000 at 10% for 2 years, interest = $200. Compound interest: P[(1+r/100) n−1]. Example: $1,000 at 10% compounded annually for 2 years earns $210 interest. Watch bases, compounding frequency, and periods carefully to avoid errors.
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Interest-based problems appear frequently in aptitude exams, and they test more than basic arithmetic. They test clarity of concepts and the ability to apply them under time pressure. The two most important forms are simple interest and compound interest. Although both use the same base values of principal, rate, and time, their calculations and outcomes differ significantly. Simple interest grows in a straight line, using the formula (P × r × T)/100. Compound interest grows at an accelerating pace, using the formula P[(1 + r/100)n – 1], where interest is reinvested periodically. The challenge is not in memorizing formulas but in applying them correctly to situations. For example, compounding frequency can make a big difference, as seen in semi-annual or quarterly compounding. Developing speed and accuracy with such problems is a key part of systematic GMAT preparation.
Simple interest adds interest only on the original principal. Compound interest adds interest on the principal plus any interest already earned.
Example: Invest 100 at 10% for 2 years.
With simple interest, each year adds 10, so total interest is 20 and the amount is 120.
With compound interest, Year 1 adds 10 to reach 110; Year 2 earns 10% on 110, which is 11, giving a final amount of 121.
The extra 1 shows interest on interest. This difference explains why compound interest grows faster over time.
The formula for simple interest is straightforward: (P × r × T)/100.
Here,
P is the principal invested,
r is the rate of interest, and
T is the time in years.
The key point is that the interest is always calculated on the original principal, making it linear and predictable.
The formula for compound interest is P[(1 + r/100)^n – 1].
Here,
P is the principal invested,
r is the rate of interest, and
n is the number of compounding periods.
Unlike simple interest, compound interest grows on both the principal and the interest already earned. As a result, compounding produces faster growth, especially when the frequency of compounding increases.
Jack invested $4,000 in a bond that returned 8% simple interest per annum. John invested $4,000 into another bond that returned 8% compound interest per annum, compounded six-monthly. What was the difference between the interests earned by Jack and John over one year?
Jack invested $4,000 at 8 percent simple interest for one year.
His interest is (4000 × 8 × 1)/100 = $320.
John invests the same $4,000 at 8 percent compound interest, but compounded half-yearly.
This means two periods of 4 percent each.
His interest is 4000 × [(1.04)^2 – 1] = $326.4.
The difference between John and Jack’s interest is $326.4 – $320 = $6.4.
$6.4, answer choice A is the correct answer.
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Simple and compound interest questions often appear deceptively easy. The trap lies in applying the wrong base or ignoring compounding frequency. With disciplined practice, especially through mock GMAT, you can master the shortcuts and avoid these common errors.
Interest teaches a quiet lesson: disciplined choices compound into outcomes far larger than the first step. With each calculation, you train patience, structure, and clarity, the very habits that shape strong careers. Let small accuracies gather into lasting strength, just as savings grow with time. Carry this mindset beyond numbers. Approach essays, recommendations, and interviews with the same steady method, aligning purpose with action. That is the spirit of a meaningful MBA admission process, and the path to enduring progress.
