CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest
At what rate of compound interest per annum will a sum of Rs 8,000 amount to Rs 9,680 in 2 years, with annual compounding?
The rate is 10% per annum. Dividing 9,680 by 8,000 gives 1.21, which is the square of 1.1, so the annual rate is 10%. Checking, 8,000 grows to 8,800 and then to 9,680.
- A9%
- B10%Correct
- C11%
- D12%
Explanation
(1 + r)^2 = 9,680/8,000 = 1.21, so 1 + r = 1.1 and r = 10%. Check: 8,000 x 1.1 = 8,800 and 8,800 x 1.1 = 9,680. A rate of 10.5% as a simple average of interest per year would be wrong, since interest of Rs 1,680 over 2 years at simple rate is 10.5%.
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