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CS Executive · Corporate Accounting and Financial Management · Time Value of Money

Ravi deposits Rs 10,000 in a bank for 2 years at 10% per annum compounded annually. What is the amount at the end of 2 years?

The amount is Rs 12,100. Compounding at 10% for two years multiplies the principal by 1.21, giving 10,000 x 1.21. Simple interest would give Rs 12,000, but compounding adds interest on the first year's interest of Rs 1,000, which is Rs 100.

  1. ARs 12,000
  2. BRs 12,100Correct
  3. CRs 11,000
  4. DRs 12,200

Explanation

FV = 10,000 x (1.10)^2 = 10,000 x 1.21 = Rs 12,100. Rs 12,000 is the simple interest result, which ignores interest earned on interest. Rs 11,000 is only one year of growth.

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