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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest

Mr. Sharma deposits Rs 1,000 at the beginning of each year for 2 years in a bank paying 10% p.a. compound interest. What will be the accumulated amount at the end of 2 years?

The accumulated amount is Rs 2,310. With deposits at the start of each year, the first grows for two years to Rs 1,210 and the second for one year to Rs 1,100. Their total is Rs 2,310, which is higher than the ordinary annuity value of Rs 2,100.

  1. ARs 2,100
  2. BRs 2,310Correct
  3. CRs 2,200
  4. DRs 2,420

Explanation

For an annuity due, the first deposit earns 2 years of interest and the second earns 1 year: 1,000 x 1.21 + 1,000 x 1.10 = 1,210 + 1,100 = Rs 2,310. Rs 2,100 is the ordinary annuity value (1,000 x 1.10 + 1,000), which wrongly treats deposits as made at year end. Rs 2,420 treats both deposits as earning 2 years of interest.

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