CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Arun invests Rs 50,000 at 12% per annum for 1 year. Interest is compounded half-yearly. What is the effective annual rate of return and the maturity value respectively?
The effective annual rate is 12.36% and the maturity value is Rs 56,180. Half-yearly compounding applies 6% twice, so the growth factor is 1.06 squared, 1.1236. Multiplying Rs 50,000 by this factor gives Rs 56,180, higher than annual compounding at 12%.
- A12.00% and Rs 56,000
- B12.36% and Rs 56,180Correct
- C12.68% and Rs 56,340
- D12.36% and Rs 56,000
Explanation
Half-yearly rate is 6%. Maturity = 50,000 x (1.06)^2 = 50,000 x 1.1236 = Rs 56,180. Effective rate = 1.1236 - 1 = 12.36%. Option 1 ignores compounding; option 4 mixes the correct rate with the simple-interest value.
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