CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Meera invests ₹1,00,000 at 10% per annum compounded annually for 2 years. How much more interest does she earn than she would under simple interest at the same rate and period?
The extra interest is ₹1,000. Compound interest is ₹21,000 and simple interest is ₹20,000. The difference equals the second-year interest earned on the first year's interest of ₹10,000 at 10%.
- A₹2,000
- B₹1,000Correct
- C₹21,000
- D₹10,000
Explanation
Compound amount = 1,00,000 × 1.1² = ₹1,21,000, so CI = ₹21,000. SI = 1,00,000 × 10% × 2 = ₹20,000. Difference = ₹1,000, which is interest on the first year's interest (10,000 × 10%). ₹21,000 is just the compound interest, not the difference.
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
- 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 …
- Arvind Traders will receive Rs 50,000 at the end of each year for 3 years. The discount rate is 10%. The PV factors at 10% for years 1, 2 an…
- Which of the following best explains why a rupee received today is considered more valuable than a rupee received one year from now?
- A perpetuity-due pays Rs 2,000 at the beginning of every year forever. At a discount rate of 10%, its present value is:
- For the growing perpetuity formula PV = C1/(r - g) to give a meaningful finite value, which condition must hold?
- Meera wants her deposit to double in exactly 6 years. Using the Rule of 72, what annual compound rate of interest must the deposit earn?