CS Executive · Corporate Accounting and Financial Management · Time Value of Money
A sum of ₹1,00,000 is invested at 12% per annum for one year. Interest is compounded half-yearly. What is the effective annual rate (EAR) and the maturity value?
The effective annual rate is 12.36% and the maturity value is ₹1,12,360. Half-yearly compounding applies 6% twice, so 1.06 squared equals 1.1236. This exceeds the 12% nominal rate because interest in the first half earns further interest.
- A12.00%; ₹1,12,000
- B12.36%; ₹1,12,360Correct
- C12.68%; ₹1,12,680
- D6.00%; ₹1,06,000
Explanation
Half-yearly rate = 6%. Maturity = 1,00,000 × (1.06)^2 = 1,00,000 × 1.1236 = ₹1,12,360, so EAR = 12.36%. The 12.68% option corresponds to quarterly compounding (1.03^4 = 1.1255 is actually 12.55%), so it is wrong anyway; 12%/₹1,12,000 ignores compounding.
Did you get it right without looking?
One question tells you little. A timed set on Time Value of Money shows your real accuracy, how long you take and where you lose marks.
More Time Value of Money questions
- Ramesh deposits ₹50,000 in a bank for 2 years at 10% per annum compounded annually. What will be the amount at the end of 2 years?
- When the number of compounding periods per year increases, with the nominal annual rate and the time period unchanged, what happens to the f…
- Rohan is offered Rs 2,42,000 at the end of 2 years. If the discount rate is 10% compounded annually, what is the present value?
- Sundaram Textiles must accumulate ₹10,00,000 at the end of 5 years to redeem a liability. It will deposit equal amounts at the end of each y…
- Ravi deposits Rs 10,000 in a bank for 2 years at 10% per annum compounded annually. What is the amount at the end of 2 years?
- Mehta Ltd expects to pay a dividend of Rs 5 at the end of next year, growing at 4% per annum forever. If the required return is 14%, the pre…