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

Iyer Pvt Ltd lends Rs 2,00,000 for 2 years. Under Option A the bank charges 9% simple interest; under Option B it charges 8% compounded annually. Which statement is correct about total interest payable?

Option B is cheaper by Rs 2,720. Simple interest at 9% for two years costs Rs 36,000, while 8% compounded annually costs 2,00,000 x 0.1664, which is Rs 33,280. Despite compounding, the lower rate makes Option B the less expensive loan over two years.

  1. AOption A costs Rs 36,000 and Option B costs Rs 33,280, so B is cheaper by Rs 2,720Correct
  2. BOption A costs Rs 36,000 and Option B costs Rs 32,000, so B is cheaper by Rs 4,000
  3. COption A costs Rs 36,000 and Option B costs Rs 33,280, so A is cheaper by Rs 2,720
  4. DOption A costs Rs 18,000 and Option B costs Rs 33,280, so A is cheaper by Rs 15,280

Explanation

Option A: 2,00,000 x 9 x 2 / 100 = Rs 36,000. Option B: 2,00,000 x (1.08^2 - 1) = 2,00,000 x 0.1664 = Rs 33,280. B is cheaper by Rs 2,720. Rs 32,000 ignores compounding; Rs 18,000 is one year of A.

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