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

Sharma Exports deposits Rs 50,000 for 2 years at 10% p.a. compounded annually. Which amount is the maturity value, and by how much does it exceed the simple-interest maturity value at the same rate?

The maturity value is Rs 60,500, exceeding the simple-interest value of Rs 60,000 by Rs 500. Compounding adds first-year interest of Rs 5,000 to the principal, so the second year earns 10% on Rs 55,000, giving Rs 5,500 rather than Rs 5,000.

  1. ARs 60,500; excess Rs 500Correct
  2. BRs 60,000; excess Rs 500
  3. CRs 60,500; excess Rs 1,000
  4. DRs 61,000; excess Rs 500

Explanation

Compound amount = 50,000 x 1.1 x 1.1 = Rs 60,500. Simple interest amount = 50,000 + 10,000 = Rs 60,000. Difference = Rs 500, which is interest on first-year interest (10% of 5,000). Rs 60,000 is the simple-interest figure, not the compound one.

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