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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

A bank offers Suresh two options on a Rs 2,00,000 deposit for 1 year at a nominal 12% per annum: Option X pays interest compounded annually; Option Y pays interest compounded half-yearly. By how much is Y's maturity value higher than X's?

Option Y is higher by Rs 720. Annual compounding gives 2,00,000 x 1.12 = Rs 2,24,000, while half-yearly compounding at 6% per half-year gives 2,00,000 x 1.1236 = Rs 2,24,720. The extra comes from interest earned on the first half-year's interest.

  1. ARs 720Correct
  2. BRs 1,200
  3. CRs 240
  4. DRs 7,200

Explanation

X: 2,00,000 x 1.12 = Rs 2,24,000. Y: half-yearly rate 6%, so 2,00,000 x 1.06 x 1.06 = 2,00,000 x 1.1236 = Rs 2,24,720. Difference = Rs 720. Rs 1,200 wrongly treats it as 6% extra on half the sum; Rs 240 is a miscalculated figure.

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