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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 semi-annually. What will be the value of the deposit after 2 years, to the nearest rupee?

The deposit grows to about Rs 58,493. With 8% compounded semi-annually, the rate is 4% per half-year for 4 periods, so 50,000 multiplied by 1.04 to the power 4 gives Rs 58,493. Annual compounding would understate the result.

  1. ARs 58,493Correct
  2. BRs 58,000
  3. CRs 58,320
  4. DRs 58,986

Explanation

Semi-annual rate is 4% for 4 periods. FV = 50,000 x (1.04)^4 = 50,000 x 1.169859 = Rs 58,493. Annual compounding would give 50,000 x 1.1664 = Rs 58,320, which ignores the extra compounding. Simple interest gives Rs 58,000.

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