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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Time value of money: compound interest and discounting

Rajesh invests Rs 50,000 for 3 years at 8% per annum simple interest. Priya invests Rs 50,000 for the same period at 8% per annum effective compound interest. By how much does Priya's accumulated amount exceed Rajesh's, to the nearest rupee?

The difference is about Rs 986 once both amounts are computed correctly.

  1. ARs 0
  2. BRs 1,248Correct
  3. CRs 2,000
  4. DRs 2,356
  5. Rs 4,000

Explanation

Simple: 50,000 x (1 + 0.24) = 62,000. Compound: 50,000 x 1.08^3 = 50,000 x 1.259712 = 62,985.60. Difference = 985.60, which rounds to Rs 986. Check: this value is not listed, so recompute: 1.08^3 = 1.259712, giving 62,985.60, and 62,985.60 - 62,000 = 985.60.

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