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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

Rohan Enterprises deposits Rs 10,000 at the beginning of each year for 3 years, earning 10% p.a. compounded annually. Its banker explains that this is an annuity due. What is the value at the end of year 3?

The value is Rs 36,410. Because each deposit is made at the start of the year, every instalment earns one additional year of interest, so the ordinary annuity value of Rs 33,100 is multiplied by 1.10 to give Rs 36,410.

  1. ARs 33,100
  2. BRs 30,000
  3. CRs 36,410Correct
  4. DRs 40,000

Explanation

Annuity due FV = ordinary annuity FV x (1+i) = 33,100 x 1.1 = Rs 36,410. Check: 10,000 x (1.331 + 1.21 + 1.1) = 10,000 x 3.641 = 36,410. Rs 33,100 ignores that each deposit earns one extra year of interest.

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