The difference between compound interest and simple interest on a principal amount over 2 years at an annual rate of 8% is Rs 786. What is the principal amount?

Explanation

Let the principal be Rs x. Simple Interest (S.I) for 2 years = x × 8/100 × 2 = 4x/25. Compound Interest (C.I) for 2 years = x × (1 + 8/100)^2 – x = x × (27/25)^2 – x = x × 729/625 – x = 104x/625. The difference between C.I and S.I = 104x/625 – 4x/25 = 4x/625. Given difference is Rs 786, so 4x/625 = 786. Solving for x gives x = (786 × 625) / 4 = Rs 120,000. Hence, the principal amount is Rs 120,000.