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

Mr. Sharma invests Rs 10,000 for 1 year at 10% p.a. nominal compounded half-yearly. How much more interest does he earn than at 10% simple interest for 1 year?

He earns Rs 25 more. Half-yearly compounding at 5% gives 10,000 x 1.1025 = Rs 11,025, so interest is Rs 1,025, while simple interest at 10% gives Rs 1,000. The difference of Rs 25 is the interest earned on the first half-year's interest.

  1. ARs 25Correct
  2. BRs 50
  3. CRs 100
  4. DRs 250

Explanation

Compound amount = 10,000 x 1.05^2 = Rs 11,025, so interest = Rs 1,025. Simple interest = Rs 1,000. Difference = Rs 25. Rs 50 would result from wrongly using 5% twice on the original principal.

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