NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Mr. Rao invests Rs 1,00,000 in a fund that pays a nominal 12% per annum compounded quarterly. What is the approximate value after 1 year, and how does it compare with annual compounding at 12%?
The value is about Rs 1,12,550, which is higher than annual compounding at 12%. Quarterly compounding applies 3% four times, giving a factor of about 1.1255 and an effective annual rate near 12.55%, against 12% for annual compounding.
- ARs 1,12,550 approx; higher than annual compoundingCorrect
- BRs 1,12,000; same as annual compounding
- CRs 1,12,550 approx; lower than annual compounding
- DRs 1,03,000; lower than annual compounding
Explanation
Quarterly rate = 3%. FV = 1,00,000 x (1.03)^4 = 1,00,000 x 1.12551 = about Rs 1,12,551. Annual compounding gives Rs 1,12,000, so more frequent compounding gives a higher value. Option 4 is only one quarter's growth.
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