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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

Ramesh deposits Rs 50,000 in a bank account that pays 8% per annum compounded annually. What will be the balance at the end of 2 years?

The balance is Rs 58,320. With annual compounding at 8%, Rs 50,000 grows by a factor of 1.08 squared, which is 1.1664. Simple interest would give only Rs 58,000, because it ignores interest earned on the interest of the first year.

  1. ARs 58,000
  2. BRs 58,320Correct
  3. CRs 58,500
  4. DRs 57,600

Explanation

FV = 50,000 x 1.08 x 1.08 = 50,000 x 1.1664 = Rs 58,320. Rs 58,000 is simple interest (50,000 + 2 x 4,000), which ignores interest earned on interest. Rs 57,600 is wrong because it treats the 8% as 4% per year over two periods.

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