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

Meera Textiles deposits Rs 10,000 at the end of each year for 3 years in a bank account paying 10% p.a. compound interest (annual compounding). What is the amount in the account at the end of year 3 (ordinary annuity)?

The amount is Rs 33,100. For an ordinary annuity with deposits at each year end, the future value is the payment times (1.1^3 - 1)/0.1, which is 3.31, giving Rs 33,100. Rs 36,410 would be the annuity-due figure.

  1. ARs 30,000
  2. BRs 33,100Correct
  3. CRs 36,410
  4. DRs 32,000

Explanation

Future value of an ordinary annuity = 10,000 x [(1.1^3 - 1)/0.1] = 10,000 x 3.31 = Rs 33,100. Check: 10,000 x 1.21 + 10,000 x 1.1 + 10,000 = 12,100 + 11,000 + 10,000 = 33,100. Rs 36,410 wrongly treats the deposits as made at the start of each year (annuity due).

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