CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Rohan deposits Rs 50,000 in a bank account paying 10% per annum compounded annually. What will be the balance at the end of 2 years if no withdrawals are made?
The balance is Rs 60,500. Under annual compounding, the future value equals principal multiplied by (1.10) squared, which is 1.21, giving 50,000 x 1.21. Simple interest would give only Rs 60,000 because it ignores interest on interest.
- ARs 60,000
- BRs 60,500Correct
- CRs 61,000
- DRs 55,000
Explanation
FV = 50,000 x (1.10)^2 = 50,000 x 1.21 = Rs 60,500. Rs 60,000 is simple interest (50,000 + 2 x 5,000), which ignores interest earned on interest.
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