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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

Rohan invests Rs 50,000 today in a bank deposit that pays 10% per annum compounded annually. What will be the value of the deposit at the end of 3 years?

The deposit grows to Rs 66,550. With annual compounding at 10%, the multiplier over three years is 1.331, and Rs 50,000 times 1.331 gives Rs 66,550. Simple interest would give only Rs 65,000 because it ignores interest earned on earlier interest.

  1. ARs 65,000
  2. BRs 66,550Correct
  3. CRs 65,500
  4. DRs 60,500

Explanation

FV = 50,000 x (1.10)^3 = 50,000 x 1.331 = Rs 66,550. Rs 65,000 results from using simple interest (50,000 + 3 x 5,000 = 65,000), which ignores interest on interest. Rs 60,500 is the value after only 2 years.

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