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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Rohan invests Rs 50,000 at 8% per annum, compounded annually. Ignoring tax, what will the investment be worth after 3 years? (1.08^3 = 1.259712)

The investment grows to about Rs 62,986. Annual compounding multiplies the principal by 1.08 three times, giving 50,000 × 1.259712. Simple interest would give only Rs 62,000 because it ignores interest earned on previously credited interest.

  1. ARs 62,000
  2. BRs 62,986Correct
  3. CRs 63,000
  4. DRs 60,000
  5. Rs 58,320

Explanation

FV = 50,000 × 1.259712 = Rs 62,985.60, about Rs 62,986. Rs 60,000 uses simple interest (50,000 × 1.24 = 62,000 would be simple interest at 8% for 3 years giving Rs 62,000). Rs 58,320 is just 50,000 × 1.1664, which compounds for only 2 years.

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