CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest
Mr. Sharma invests Rs 20,000 for 2 years at 10% per annum, compounded annually. What is the compound interest earned at the end of 2 years?
The compound interest is Rs 4,200. The amount after two years is 20,000 multiplied by 1.21, which gives Rs 24,200, and subtracting the principal of Rs 20,000 leaves Rs 4,200. Simple interest would give only Rs 4,000.
- ARs 4,000
- BRs 4,200Correct
- CRs 4,400
- DRs 2,100
Explanation
Amount = 20,000 x (1.1)^2 = 20,000 x 1.21 = Rs 24,200. Compound interest = 24,200 - 20,000 = Rs 4,200. Rs 4,000 is simple interest for 2 years, which ignores interest on interest.
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