Question 1

At compound interest, the amount on a certain principal at the end of the 2nd year is Rs 9,600 and at the end of the 3rd year is Rs 10,272. What is the annual rate of interest (in percent)?

Accepted Answer

Introduction / Context: In this problem, we are given the compound interest amounts at the end of two successive years, specifically at the end of the 2nd and 3rd years, and we are asked to determine the annual rate of interest. This is a neat property of compound interest: the ratio of the amount at the end of year (n + 1) to the amount at the end of year n directly reveals the factor (1 + r/100). Therefore, once we know two consecutive year-end amounts, the rate can be found very quickly without even knowing the principal. Given Data / Assumptions: Amount at the end of 2nd year, A2 = Rs 9,600. Amount at the end of 3rd year, A3 = Rs 10,272. Interest is compounded annually. Principal P is unknown, and we only have to find the rate r. Concept / Approach: Under compound interest with annual compounding, the amount after n years is A_n = P * (1 + r/100)^n. Therefore, A_(n+1) / A_n = (1 + r/100) for all n. Here, taking A3 / A2 immediately gives us (1 + r/100). We then subtract 1 and convert to percent to obtain r. This method avoids computing P and exploits the multiplicative structure of compound growth across consecutive years. Step-by-Step Solution: Given A2 = P * (1 + r/100)^2 and A3 = P * (1 + r/100)^3. Divide A3 by A2: A3 / A2 = (P * (1 + r/100)^3) / (P * (1 + r/100)^2) = 1 + r/100. Compute A3 / A2 = 10,272 / 9,600. 10,272 / 9,600 = 1.07. So, 1 + r/100 = 1.07. Therefore, r/100 = 0.07 and r = 7%. Thus, the annual compound interest rate is 7%. Verification / Alternative check: We can confirm by reconstructing the sequence of amounts. Suppose P is the amount at time zero. After 2 years: A2 = P * (1.07)^2 = 9,600. After 3 years: A3 = P * (1.07)^3 = A2 * 1.07 = 9,600 * 1.07 = 10,272, which matches the given value. This perfect consistency shows that 7% is indeed the correct annual rate. The exact principal is not required, but if needed, it could be obtained from P = 9,600 / (1.07)^2. Why Other Options Are Wrong: If the rate were 6%, then the ratio A3 / A2 would be 1.06, not 1.07. For 5%, the ratio would be 1.05, and for 8%, it would be 1.08. None matches the observed ratio of 10,272 / 9,600 = 1.07. A rate of 10% would give even larger growth. Hence, only 7% is consistent with the given pair of successive amounts. Common Pitfalls: Some students attempt to reintroduce the principal and form two separate equations in P and r, which makes the problem unnecessarily complicated. Others compute the difference in amounts (10,272 - 9,600) and try to interpret it directly as interest on principal, which is incorrect because the base amount for the 3rd year interest is A2, not P. The key is remembering that consecutive amounts under compound interest differ by a constant multiplicative factor equal to (1 + r/100). Final Answer: The annual rate of compound interest is 7% per annum.

Question 2

Find the compound interest on Rs 16,000 invested at 20% per annum for 9 months, if the interest is compounded quarterly (every 3 months).

Accepted Answer

Introduction / Context: This question involves compound interest over a fractional time period, where the nominal annual rate is 20% and compounding is quarterly. The total duration is 9 months, which corresponds to three quarters of a year. Because the compounding frequency matches the fraction of the year, we can treat the duration as an integer number of compounding periods, which simplifies the calculation. We must compute the final amount after 3 quarters and then subtract the principal to obtain the compound interest. Given Data / Assumptions: Principal P = Rs 16,000. Nominal rate r = 20% per annum. Compounding frequency: quarterly. Total time = 9 months = 3 quarters. We need to find the compound interest (CI) for this period. Concept / Approach: For quarterly compounding, the period rate is r/4 per quarter, and the number of compounding periods is 4 * (time in years). Here, r/4 = 20/4 = 5% per quarter. The time is 9 months, which is 9/12 = 3/4 years, corresponding to 3 quarters. Thus, we use A = P * (1 + 0.05)^3. Once we find the amount A, the compound interest is CI = A - P. The numbers are manageable, and we can compute (1.05)^3 exactly with careful multiplication. Step-by-Step Solution: Periodic rate per quarter = 20% / 4 = 5% = 0.05. Number of quarters in 9 months = 3. Amount A after 3 quarters = 16,000 * (1.05)^3. Compute (1.05)^2 = 1.1025. Now (1.05)^3 = 1.1025 * 1.05 = 1.157625. Hence A = 16,000 * 1.157625 = 18,522 (approximately). Compound interest CI = A - P = 18,522 - 16,000 = 2,522. Therefore, the CI for 9 months is Rs 2,522. Verification / Alternative check: We can also compute stepwise for each quarter. After the 1st quarter: 16,000 * 1.05 = 16,800. After the 2nd quarter: 16,800 * 1.05 = 17,640. After the 3rd quarter: 17,640 * 1.05 = 18,522. This gives the same final amount. Subtracting Rs 16,000 again yields Rs 2,522 in interest. Since both the direct power method and stepwise method agree, the result is reliable. Why Other Options Are Wrong: Rs 2,422 and Rs 2,322 are slightly smaller and would correspond to a lower effective factor than (1.05)^3, implying a rate below 20% nominal. Rs 3,522 and Rs 2,800 are larger than the correctly computed interest and would result from incorrect rates or more than three compounding periods. Hence, only Rs 2,522 matches the exact exponential growth for 3 quarters at 5% per quarter. Common Pitfalls: Some test-takers mistakenly treat 9 months as 0.75 years and then apply simple interest or annual compounding rather than quarterly compounding. Another common error is to miscount the number of quarters or to use 20% as the quarterly rate rather than 5%. Always convert months into the correct number of compounding periods and divide the annual nominal rate by the number of periods per year before using the compound interest formula. Final Answer: The compound interest earned on Rs 16,000 for 9 months is Rs 2,522.

Question 3

What is the difference between the compound interest on Rs 5000 for 1 1/2 years at 4% per annum when interest is compounded yearly and when it is compounded half-yearly?

Accepted Answer

Introduction / Context: This question compares two ways of compounding interest for the same principal, rate, and total time period of 1 1/2 years (that is, 1.5 years). In the first case, interest is compounded yearly at 4% per annum. In the second case, interest is compounded half-yearly at an effective rate of 2% per half-year. We are asked to find the difference between the compound interests obtained in these two scenarios. This problem highlights how compounding frequency affects the total interest earned over a given period. Given Data / Assumptions: Principal P = Rs 5,000. Nominal annual rate r = 4% per annum. Total time T = 1.5 years (1 1/2 years). Case 1: CI compounded yearly at 4%. Case 2: CI compounded half-yearly at 4% nominal (2% per half-year). We must compute the difference between the two compound interests. Concept / Approach: For yearly compounding over 1.5 years, one standard approach is to treat the first full year under compound interest and the remaining half-year under simple interest calculated on the amount at the end of the first year. For half-yearly compounding, we count the number of half-year periods: 1.5 years = 3 half-years, with an interest rate of 2% per half-year. We compute the final amounts in both cases, subtract the principal to obtain each CI, and finally take the difference. Careful handling of the half-year simple interest in the first case is important. Step-by-Step Solution: Case 1 (Yearly compounding): After 1 year at 4%, amount A1 = 5,000 * 1.04 = 5,200. For the remaining 0.5 year, interest is taken as simple interest on 5,200 at 4% per annum for half a year. That half-year interest = 5,200 * 4/100 * 1/2 = 5,200 * 0.02 = 104. So final amount in Case 1 = 5,200 + 104 = 5,304, and CI1 = 5,304 - 5,000 = 304. Case 2 (Half-yearly compounding): Rate per half-year = 4% / 2 = 2% = 0.02. Number of half-year periods in 1.5 years = 3. Amount A2 = 5,000 * (1.02)^3. Compute (1.02)^2 = 1.0404; then (1.02)^3 = 1.0404 * 1.02 = 1.061208. So A2 = 5,000 * 1.061208 = 5,306.04; CI2 = 5,306.04 - 5,000 = 306.04. Difference in interest = CI2 - CI1 = 306.04 - 304 = 2.04. Verification / Alternative check: We can round the second amount to two decimal places at each step to see that the effect of more frequent compounding is modest over this short period and low rate. A small difference of Rs 2.04 is reasonable. If the difference were very large, such as Rs 5 or Rs 10, it would suggest a miscalculation. Our stepwise computations align with the exact formula and typical exam answers, confirming that Rs 2.04 is correct. Why Other Options Are Wrong: Rs 3.06 and Rs 3.65 are larger than the difference created by these mild changes in compounding frequency and would correspond to either higher rates or longer durations. Rs 5.40 is even more unrealistic for such a small principal and short period. Rs 1.50 is too small and does not match the calculated difference of Rs 2.04. Thus, only Rs 2.04 corresponds to the exact arithmetic difference between the two compound interest amounts. Common Pitfalls: One common mistake is to treat 1.5 years as exactly 1.5 compounding periods in the yearly compounding case, which is not valid since compounding is done once per year. Another error is to forget that under half-yearly compounding the rate per period is 2%, not 4%. Students also sometimes subtract the two final amounts incorrectly or round numbers too aggressively before subtraction. Performing the calculations in a structured order and retaining sufficient precision prevents such errors. Final Answer: The difference between the two compound interests is Rs 2.04.

Question 4

The compound interest on Rs 30,000 at 7% per annum amounts to Rs 4,347. For how many years (whole years) was the sum invested?

Accepted Answer

Introduction / Context: This question gives us the principal, the annual compound interest rate, and the total compound interest earned, and asks for the time in years. Because both the rate and the time are in whole years with annual compounding, we can use the compound interest formula to compute the amount for different integer values of time and match the one that produces the given interest. This problem reinforces familiarity with typical growth patterns at standard rates like 7%. Given Data / Assumptions: Principal P = Rs 30,000. Rate r = 7% per annum. Compound interest CI = Rs 4,347. Compounding is annual. We must find the number of years t (an integer) such that the CI matches the given value. Concept / Approach: For annual compounding, the amount after t years is A = P * (1 + r/100)^t. The compound interest is CI = A - P. Thus, P * [(1 + r/100)^t - 1] should equal the given interest, 4,347. We can try small integer values of t, such as 1, 2, 3, and so on, and see which value makes the interest match. This is very efficient in an exam setting where t is expected to be a small whole number. Step-by-Step Solution: We have CI = 4,347, P = 30,000 and r = 7%. For t = 1 year: A = 30,000 * 1.07 = 32,100, so CI = 2,100 (too small). For t = 2 years: A = 30,000 * (1.07)^2. Compute (1.07)^2 = 1.1449, so A = 30,000 * 1.1449 = 34,347. So CI for 2 years = 34,347 - 30,000 = 4,347, which matches the given value. Hence, the required time is t = 2 years. Verification / Alternative check: To be thorough, we can check t = 3 years as well. For 3 years, A = 30,000 * (1.07)^3, which would be 30,000 * 1.225043 = 36,751.29 (approximately), giving CI ≈ 6,751.29, which is much higher than 4,347. Thus, the only integer time that fits the given interest amount is 2 years. Therefore, our answer is uniquely determined and consistent with the data. Why Other Options Are Wrong: For 1 year, the interest is only Rs 2,100, not Rs 4,347. For 3 years, the interest exceeds Rs 6,700. For 4 or 5 years, the interest becomes even larger as compound growth accelerates. Hence, none of these durations will yield exactly Rs 4,347 in compound interest on Rs 30,000 at 7% per annum. Common Pitfalls: Learners sometimes miscalculate powers like (1.07)^2 or misinterpret the given Rs 4,347 as the final amount instead of the interest. It is important to keep track of whether the problem is giving CI or A and to subtract or add the principal correctly. Another error is assuming the time must be fractional; exam questions of this type almost always use small integer values of t that can be quickly tested. Final Answer: The sum was invested for 2 years at 7% per annum compound interest.

Question 5

For a certain investment at compound interest, what is the annual rate of interest?

I. The principal amount was invested for 4 years. 
II. The total interest earned in 4 years was Rs 1,491.

Based on the information in statements I and II, wh…

Accepted Answer

Introduction / Context: This is a data sufficiency question based on compound interest. Instead of asking directly for a numerical value, it asks whether the given statements provide enough information to determine the annual rate of interest. We are told that a principal is invested at compound interest for 4 years and that the total interest earned in 4 years is Rs 1,491. We must reason carefully about whether this information identifies a unique rate of interest or whether multiple rates and principals could generate the same total interest, making the rate indeterminate. Given Data / Assumptions: We consider a principal P invested at an unknown annual compound interest rate r%. Statement I: The principal is invested for 4 years. Statement II: The total interest earned over 4 years is Rs 1,491. We do not know the value of P from either statement. Interest is understood to be compounded annually unless stated otherwise. Concept / Approach: For compound interest, the amount after 4 years is A = P * (1 + r/100)^4 and the interest earned is I = A - P. Therefore, I = P * [(1 + r/100)^4 - 1]. To determine r, we must know the relationship between I and P. If both P and I were known, we could set up an equation in r. However, we only know I = 1,491 and the time 4 years; we do not know P. The data sufficiency task is to see whether knowing only time and total interest, without principal or final amount, is enough to uniquely determine r. Step-by-Step Solution: Consider statement I alone: It only tells us that t = 4 years. There is no information about P, r, or the amount, so we cannot find r. Statement I alone is not sufficient. Consider statement II alone: It gives the total interest I = 1,491, but neither P nor t nor the final amount is specified. Without P, we cannot form a complete equation linking I and r. Therefore, statement II alone is not sufficient. Combine statements I and II: Now we know t = 4 years and I = 1,491, but we still do not know P. The governing equation is I = P * [(1 + r/100)^4 - 1] = 1,491. This equation involves two unknowns, P and r, but only one equation; hence, infinitely many pairs (P, r) can satisfy it. Since we cannot isolate a unique value of r from this single equation, even using both statements together is not sufficient. Verification / Alternative check: To see this concretely, suppose we guess r = 5%. Then the factor [(1 + 0.05)^4 - 1] is approximately 0.215506. For I = 1,491, we would get P ≈ 1,491 / 0.215506, some positive principal. If we instead guess r = 6%, we would have a different factor and another positive solution for P. Because we can always adjust P to satisfy the same total interest for different r values, the rate r cannot be unique given only I and t. Therefore, the data is insufficient to determine r uniquely. Why Other Options Are Wrong: Option a is wrong because statement I alone provides only the time, not P or I. Option b is wrong because knowing only the total interest without principal or time does not fix the rate. Option c is wrong as both statements together still leave us with two unknowns and one equation. Option d is clearly wrong because neither statement alone is sufficient, so they certainly cannot both be sufficient individually. Only option e correctly captures that even combined, statements I and II do not provide enough information to find a unique rate. Common Pitfalls: A frequent mistake is to assume that knowing the time and the total interest is always sufficient. This is true for some simple interest problems where principal might be assumed or indirectly known, but under compound interest with an unknown principal, the situation is different. Another error is to misread the question and think that the principal is given when it is not. Data sufficiency questions require strict attention to what is actually provided and whether it leads to a unique solution, not just some equation involving the unknowns. Final Answer: Even when considered together, statements I and II are not sufficient to determine the rate of compound interest, so the correct choice is “Even both statements I and II together are not sufficient to answer the question.”

Question 6

If the simple interest on a certain sum of money for 2 years at 5% per annum is Rs 50, then what is the compound interest on the same sum at the same rate and for the same time, when interest is compounded annually?

Accepted Answer

Introduction / Context: This problem links simple interest (SI) and compound interest (CI) on the same sum, rate, and time. We are told the simple interest for 2 years at 5% per annum and must find the compound interest for the same period, with annual compounding. Such questions are useful for practicing the conversion between SI and CI and for reinforcing the basic formulas for both types of interest. Given Data / Assumptions: Simple interest SI for 2 years = Rs 50. Rate r = 5% per annum. Time t = 2 years. Interest is to be compounded annually for the CI calculation. Principal P is unknown but can be derived from the SI information. Concept / Approach: For simple interest, SI = P * r * t / 100. We use this equation to find the principal P. Once we know P, we apply the compound interest formula A = P * (1 + r/100)^t to find the amount A after 2 years. The compound interest is then CI = A - P. Because the time and rate are small, the calculations are straightforward, and we can find the exact value of CI without complex tools. Step-by-Step Solution: We know SI = P * r * t / 100. Substitute SI = 50, r = 5, t = 2. So 50 = P * 5 * 2 / 100 = P * 10 / 100 = 0.10P. Therefore, P = 50 / 0.10 = 500. Now compute the amount under compound interest for 2 years at 5% per annum: A = 500 * (1.05)^2. Compute (1.05)^2 = 1.1025. So A = 500 * 1.1025 = 551.25. Hence, compound interest CI = A - P = 551.25 - 500 = 51.25. Therefore, the required compound interest is Rs 51.25. Verification / Alternative check: We can compare SI and CI directly. For P = 500, SI at 5% for 2 years is 500 * 5 * 2 / 100 = 50, which matches the given value. The first year's CI is 500 * 0.05 = 25, making the amount 525. The second year's CI is 525 * 0.05 = 26.25. Total CI = 25 + 26.25 = 51.25. This stepwise reasoning confirms the compound interest value obtained from the formula method. Why Other Options Are Wrong: Rs 61.25 is too high and would require a larger rate or longer time period. Rs 51 is close but slightly less than the exact CI and typically results from rounding errors or treating both years as if they had the same interest of 25.5. Rs 42 is too low and Rs 50 is exactly the SI, not the CI. Only Rs 51.25 fits the detailed compound interest computation. Common Pitfalls: Some students incorrectly assume that CI will always exceed SI by a large margin and choose the option that appears significantly larger. Others forget that the principal for the second year of CI includes the first year's interest. Using simple interest logic in the compound interest phase leads to wrong answers. Careful application of the formula or a year-by-year breakdown is essential to obtain the correct result. Final Answer: The compound interest on the sum at 5% per annum for 2 years is Rs 51.25.

Question 7

The difference between the simple interest and the compound interest on Rs 1,200 for 1 year at 10% per annum, when compound interest is reckoned half-yearly, is equal to how many rupees?

Accepted Answer

Introduction / Context: This question compares simple interest (SI) and compound interest (CI) on the same principal for 1 year at a rate of 10% per annum, where the compound interest is calculated half-yearly. Because the time is only 1 year, SI is straightforward, and CI with half-yearly compounding involves two periods of 6 months each. We are asked specifically for the difference CI - SI, which is a standard exam pattern for illustrating the effect of more frequent compounding over a short period. Given Data / Assumptions: Principal P = Rs 1,200. Nominal annual rate r = 10% per annum. Total time t = 1 year. Simple interest uses annual rate 10% for 1 year. Compound interest is calculated half-yearly at 5% per half-year. We must find the numerical difference between CI and SI. Concept / Approach: Simple interest for 1 year is SI = P * r * t / 100. For half-yearly compounding, the rate per period is r/2 and the number of periods is 2 per year. So the amount under CI is A = P * (1 + r/(2 * 100))^2. The compound interest CI is A - P. After we compute SI and CI, their difference CI - SI will give the answer. Because the rate and time are small, we can calculate all numbers exactly without approximation. Step-by-Step Solution: Simple interest SI = P * r * t / 100 = 1,200 * 10 * 1 / 100. So SI = 1,200 * 0.10 = Rs 120. For compound interest with half-yearly compounding, rate per half-year = 10% / 2 = 5% = 0.05. Number of half-year periods in 1 year = 2. Amount A under CI = 1,200 * (1.05)^2. Compute (1.05)^2 = 1.1025. So A = 1,200 * 1.1025 = 1,323. Therefore, CI = A - P = 1,323 - 1,200 = Rs 123. Difference CI - SI = 123 - 120 = Rs 3. Verification / Alternative check: We can also compute CI stepwise. After the first 6 months, interest is 1,200 * 5/100 = 60, so the amount becomes 1,260. For the next 6 months, interest is 1,260 * 5/100 = 63, making the final amount 1,323. The total CI is 60 + 63 = 123, which is again Rs 3 more than the simple interest of 120. The agreement between both methods confirms the accuracy of the result. Why Other Options Are Wrong: Differences like Rs 2 or Rs 4 would result from miscalculating one of the half-year periods or from rounding errors. Rs 5 and Rs 6 are too large for a small principal and a moderate rate over only one year. The exact computation shows that the difference is Rs 3, which matches only one of the given options. Common Pitfalls: A common error is to mistakenly apply 10% for each half-year (making it effectively 20% per annum), which greatly overstates CI. Another mistake is to forget to square the factor 1.05 and instead use it only once. Students may also subtract SI from P instead of subtracting SI from CI. Carefully distinguishing the two interest types and tracking each step avoids these mistakes. Final Answer: The difference between the compound interest and the simple interest is Rs 3.

Question 8

The difference between the compound interest and the simple interest on an amount of Rs 15,000 for 2 years is Rs 96. What is the annual rate of interest (in percent)?

Accepted Answer

Introduction / Context: In this problem, we compare compound interest (CI) and simple interest (SI) on the same principal and time, and the difference between them is given. We must find the annual rate of interest. There is a useful shortcut for the difference between CI and SI for 2 years at the same rate, which depends on the square of the rate and the principal. Using this shortcut makes the problem very quick and is commonly tested in aptitude exams. Given Data / Assumptions: Principal P = Rs 15,000. Time t = 2 years. Difference between CI and SI over 2 years is Rs 96. Interest is compounded annually for the CI part. Annual rate of interest r (in percent) is unknown and needs to be found. Concept / Approach: For 2 years, the difference between compound interest and simple interest at rate r% per annum on principal P is given by Difference = P * r^2 / 100^2. This formula comes from comparing P * (1 + r/100)^2 - P (which is CI) with P * r * 2 / 100 (which is SI). Applying this formula, we substitute P = 15,000 and the known difference and solve the resulting quadratic relationship for r. Because standard exam questions usually use neat numeric values, r will turn out to be a simple integer percentage. Step-by-Step Solution: Use the formula for 2 years: Difference = P * r^2 / 100^2. We have Difference = 96 and P = 15,000. So 96 = 15,000 * r^2 / 10,000. Simplify the factor: 15,000 / 10,000 = 1.5, so 96 = 1.5 * r^2. Therefore, r^2 = 96 / 1.5 = 64. Taking the positive square root (since rate is positive), r = 8. Hence, the annual rate of interest is 8% per annum. Verification / Alternative check: To verify, we can compute SI and CI separately for r = 8%. Simple interest for 2 years: SI = 15,000 * 8 * 2 / 100 = 15,000 * 0.16 = 2,400. Amount under CI: A = 15,000 * (1.08)^2 = 15,000 * 1.1664 = 17,496. So CI = 17,496 - 15,000 = 2,496. Difference CI - SI = 2,496 - 2,400 = 96, which matches the given difference exactly, confirming that 8% is correct. Why Other Options Are Wrong: If r = 10%, then r^2 = 100 and the difference would be 15,000 * 100 / 10,000 = 150, not 96. For r = 12%, r^2 = 144 and the difference becomes 15,000 * 144 / 10,000 = 216, again not 96. For r = 14% or 6%, the differences would be 294 and 54 respectively. None of these match the given Rs 96 difference, so they cannot be correct. Common Pitfalls: Some test-takers mistakenly use the 3-year difference formula or attempt to derive SI and CI separately without noticing the 2-year shortcut, which makes the process longer and prone to arithmetic errors. Others forget to square the rate when applying the shortcut, which leads to a very different value of r. Being aware of and correctly using the special formula for 2 years is crucial for speed and accuracy in such questions. Final Answer: The annual rate of interest is 8% per annum.

Question 9

An amount of money was lent for 3 years. What will be the difference between the simple interest and the compound interest earned on it at the same rate?

I. The rate of interest was 8% per annum. 
II. The total simple interest earned in 3 years…

Accepted Answer

Introduction / Context: This is another data sufficiency question related to the difference between simple interest (SI) and compound interest (CI) over 3 years. Instead of asking for a direct numerical value in the options, the question asks whether the given statements provide enough information to determine the difference between SI and CI. We must analyze the information from each statement and then from both together, focusing on whether they allow us to compute a unique value for the difference. Given Data / Assumptions: A principal P is lent at an annual rate r% for 3 years. Interest is compounded annually for CI. Statement I: The rate of interest was 8% per annum. Statement II: The total simple interest earned in 3 years was Rs 1,200. We must decide whether these statements individually or jointly are sufficient to determine the numerical difference between SI and CI for 3 years. Concept / Approach: For time t = 3 years, simple interest is SI = P * r * t / 100, and compound interest is CI = P * [(1 + r/100)^3 - 1]. The difference between CI and SI depends on both P and r. To compute this difference numerically, we need enough information to determine both P and r or at least enough independent equations linking them. Statement I gives r, but not P. Statement II gives SI and t, and r is unknown unless we combine the statements. Data sufficiency problems require us to check whether the available information results in a fully determined value for the required quantity. Step-by-Step Solution: Consider statement I alone: r = 8% per annum, but P and the simple interest are unknown. We cannot compute SI or CI numerically, so the difference remains unknown. Statement I alone is not sufficient. Consider statement II alone: SI for 3 years is Rs 1,200, but P and r are both unknown. The formula SI = P * r * 3 / 100 gives one equation in two unknowns, which is not enough to determine either P or r uniquely. Statement II alone is not sufficient. Now combine statements I and II: from statement I, r = 8%. Substitute into the SI formula: SI = P * 8 * 3 / 100 = P * 24 / 100 = 0.24P. Statement II says SI = 1,200, so 0.24P = 1,200. This gives P = 1,200 / 0.24 = 5,000. Now that we know both P and r, we can compute both SI and CI and hence their difference. Verification / Alternative check: Let us actually compute the difference: With P = 5,000 and r = 8%, SI for 3 years is 5,000 * 8 * 3 / 100 = 1,200, matching the given value. The amount under CI after 3 years is A = 5,000 * (1.08)^3. Compute (1.08)^2 = 1.1664; (1.08)^3 = 1.259712. Thus, A = 5,000 * 1.259712 = 6,298.56, so CI ≈ 1,298.56. The difference CI - SI ≈ 98.56. Although we do not need the exact numerical difference for the data sufficiency answer, this calculation shows that with both statements we can indeed determine a unique difference. Why Other Options Are Wrong: Option a is wrong because knowing only the rate (8%) does not fix the principal, so we cannot obtain any numerical interest values. Option b is wrong because knowing only the total SI (1,200) without the rate does not allow us to identify P or r uniquely. Option d is wrong because neither statement alone is sufficient, so they certainly cannot both be sufficient individually. Option e is wrong because, as shown above, with both statements combined we can compute both P and r and then the exact difference between SI and CI. Only option c correctly states that both statements together are sufficient, but neither alone is sufficient. Common Pitfalls: Many students see a known rate in one statement and a known SI value in the other and jump to the conclusion that each is sufficient on its own. However, for compound interest problems, the difference between SI and CI depends on both principal and rate, and an incomplete set of data leaves ambiguity. Always check if there are enough independent equations to determine all the necessary unknowns. If two unknowns remain with only one equation, the data is insufficient. Final Answer: Both statements I and II together are sufficient to determine the difference between SI and CI, but neither statement alone is sufficient, so the correct choice is “Both statements I and II together are sufficient, but neither alone is sufficient.”

Question 10

You deposit $6500 into an account paying 8% annual interest compounded monthly. How much money (to the nearest cent) will be in the account after 7 years?

Accepted Answer

Introduction / Context: This question involves compound interest with monthly compounding on a dollar-denominated deposit. The nominal annual interest rate is 8%, the compounding frequency is 12 times per year, and the investment horizon is 7 years. We are asked for the future value of a single deposit at this rate and compounding schedule. This is a typical financial mathematics problem that reinforces the general compound interest formula with more frequent than annual compounding. Given Data / Assumptions: Initial deposit P = $6500. Nominal annual interest rate r = 8% per year. Compounding frequency: monthly, i.e., n = 12 compounding periods per year. Time t = 7 years. Interest is compounded monthly at an effective rate of r/12 per month. We need to find the final account balance (amount) after 7 years. Concept / Approach: For compound interest with more frequent compounding, the amount after t years is given by A = P * (1 + r/(100n))^(n*t), where r is the nominal annual rate and n is the number of compounding periods per year. Here, r = 8, n = 12 and t = 7, so the monthly rate is 8/12 percent per month. We then compute the power over 12 * 7 = 84 periods. The resulting value gives the accumulated balance in the account, including both the principal and the interest earned. Step-by-Step Solution: Monthly interest rate = 8% / 12 = 0.6666...% per month. In decimal form, monthly rate = 0.08 / 12 ≈ 0.0066667. Number of months in 7 years = 12 * 7 = 84. Use A = 6500 * (1 + 0.08 / 12)^(84). Compute the growth factor: (1 + 0.08 / 12) ≈ 1.0066667. Raise this to the 84th power: (1.0066667)^(84) ≈ 1.747426 (approximate value). Therefore, A ≈ 6500 * 1.747426 ≈ 11,358.24. So the account balance after 7 years is approximately $11,358.24. Verification / Alternative check: We can check whether this value is reasonable. At simple interest of 8% for 7 years, the amount would be A_simple = 6500 * (1 + 0.08 * 7) = 6500 * 1.56 = 10,140. Under monthly compounding, we expect a slightly higher amount than under simple interest, but not dramatically larger. The result $11,358.24 represents about 174.7% of the original principal, which is consistent with a moderate increase due to compounding over 7 years at 8%. The answer also fits common financial tables or calculator outputs for this rate and horizon. Why Other Options Are Wrong: $12,334.00 and $12,386.00 are somewhat higher than the correct value and would correspond to either a higher effective interest rate or a longer duration. $15,789.00 is far too high relative to an 8% nominal rate and 7-year period and would require either a much higher rate or additional deposits. $10,000.00 is too low, since even simple interest would yield over $10,000. Only $11,358.24 matches the correct compound interest computation and is consistent with the modest boost from monthly compounding. Common Pitfalls: Some students mistakenly use 8% as the monthly rate instead of dividing by 12, which massively overestimates the final amount. Others forget to convert the percentage to a decimal before plugging into the formula or use t = 7 months instead of 7 years. It is also common to confuse the formula for a single lump-sum future value with formulas for annuities (regular monthly deposits). Always check that the given scenario involves a single deposit, and ensure that both the rate and the number of periods are expressed in consistent units. Final Answer: After 7 years, the account balance will be approximately $11,358.24.

Question 11

How much money would you need to deposit today at 9% annual interest compounded monthly in order to have $12,000 in the account after 6 years?

Accepted Answer

Introduction / Context: This is a present value problem involving compound interest with monthly compounding. Instead of asking for the future value of a current deposit, the question provides a desired future amount and asks how much must be deposited today to reach that amount. The nominal annual interest rate is 9%, and interest is compounded monthly for 6 years. Such questions are common in financial planning and time value of money calculations. Given Data / Assumptions: Desired future amount A = $12,000. Nominal annual interest rate r = 9% per annum. Compounding frequency: monthly (n = 12 times per year). Time t = 6 years. We assume a single lump-sum deposit today with no additional contributions. We must find the present value P that grows to $12,000 under these conditions. Concept / Approach: With monthly compounding, the future value of a lump sum is A = P * (1 + r/(100n))^(n*t). To find the required present deposit P for a given future amount A, we rearrange the formula to P = A / (1 + r/(100n))^(n*t). Here, r = 9, n = 12 and t = 6. The monthly interest rate is thus 9/12 percent per month. By computing the growth factor over 72 months and dividing the target amount by this factor, we obtain the necessary deposit today. Step-by-Step Solution: Monthly interest rate = 9% / 12 = 0.75% per month. In decimal form, monthly rate = 0.09 / 12 = 0.0075. Number of months in 6 years = 12 * 6 = 72. Growth factor over 6 years = (1 + 0.0075)^(72). This factor is approximately (1.0075)^(72) ≈ 1.7123 (approximate value). Present value P = 12,000 / 1.7123 ≈ 7,007.08. Hence, you must deposit approximately $7,007.08 today. Verification / Alternative check: We can verify that this amount is plausible. At simple interest of 9% for 6 years, the amount would be A_simple = P * (1 + 0.09 * 6) = P * 1.54. For P around $7,000, that gives about $10,780, which is less than 12,000, so compounding monthly should require a deposit somewhat below $12,000 / 1.54 ≈ $7,792 but above $12,000 / 2 ≈ $6,000. The computed value of about $7,007.08 fits comfortably in this expected range and matches more precise calculations using financial calculators or spreadsheets. Why Other Options Are Wrong: $9,007 and $8,007 are too high; depositing that much would grow to significantly more than $12,000 under 6 years of monthly compounding at 9%. $4,007 is much too low and would not have enough time to grow to $12,000 at this rate. $6,500 would also fall short. Only $7,007.08 corresponds to the correct present value when we solve the compound interest equation exactly. Common Pitfalls: Mistakes include using 9% as the monthly rate instead of dividing by 12, which dramatically underestimates the required deposit, or confusing present value and future value formulas. Some may also incorrectly treat 6 years as 6 months when counting periods. Always ensure consistency in time units and interest rate units, and correctly rearrange the formula to solve for P rather than A. Final Answer: You must deposit approximately $7,007.08 today to have $12,000 after 6 years at 9% compounded monthly.

Question 12

You deposit $300 in a savings account that pays 4% simple annual interest. What will be your account balance after 9 months?

Accepted Answer

Introduction / Context: This question is a straightforward simple interest calculation involving a fractional time period measured in months. The deposit is $300, the annual simple interest rate is 4%, and the time is 9 months. We must compute the interest earned over this period and add it to the principal to find the final account balance. Such problems are basic but important for understanding how banks calculate simple interest over partial years. Given Data / Assumptions: Principal P = $300. Annual simple interest rate r = 4% per annum. Time = 9 months. Interest is calculated using the simple interest formula, not compound interest. We must find the account balance (principal plus interest) after 9 months. Concept / Approach: Simple interest is given by SI = P * r * t / 100, where t is the time in years. Since the time is given in months, we convert 9 months to years by using t = 9 / 12 = 3 / 4 year. We then compute the simple interest on $300 for 3/4 of a year at 4% per annum. The account balance at the end of this period is P + SI. Because the numbers are small and neat, the calculation is very quick. Step-by-Step Solution: Convert time to years: t = 9 months = 9/12 years = 3/4 year = 0.75 year. Use SI = P * r * t / 100. Substitute P = 300, r = 4, t = 0.75. SI = 300 * 4 * 0.75 / 100. Compute 4 * 0.75 = 3, so SI = 300 * 3 / 100 = 300 * 0.03 = 9. Therefore, the interest earned over 9 months is $9. Final account balance = principal + interest = 300 + 9 = 309. Verification / Alternative check: We can reason proportionally. A full year of simple interest at 4% on $300 would yield 300 * 4/100 = 12 dollars. Nine months is three quarters of a year, so the interest must be three quarters of $12, which is 12 * 3/4 = 9 dollars. This matches our previous calculation. Adding that to the principal gives 309 dollars. Both methods agree perfectly and confirm the result. Why Other Options Are Wrong: $409 and $509 are far too high given the low interest rate and short time period; they imply an extra $100 or $200 in interest, which is unrealistic. $609 is obviously impossible because it doubles the principal in 9 months at only 4% per annum. $305 would correspond to $5 in interest, which would imply a shorter time or a lower rate. Only $309 matches the correct simple interest calculation for 9 months at 4% on $300. Common Pitfalls: A common mistake is forgetting to convert months into years and instead using t = 9 directly in the formula, which produces absurdly large interest. Others may confuse simple interest with compound interest and attempt repeated multiplication steps, which is unnecessary and incorrect in this context. Carefully converting the time and applying the simple interest formula ensures the correct result. Final Answer: The account balance after 9 months will be $309.

Question 13

Simon deposits $400 in an account that pays 3% interest compounded annually. What will be the balance in Simons account at the end of 2 years?

Accepted Answer

Introduction / Context: This is a basic compound interest question involving a small principal, a modest annual interest rate, and a short time period. Simon deposits $400 at 3% interest, compounded annually, and we are asked to find the account balance after 2 years. This exercise reinforces understanding of the compound interest formula with annual compounding and shows the difference between linear and exponential growth over a short horizon. Given Data / Assumptions: Principal P = $400. Annual interest rate r = 3% per annum. Time t = 2 years. Interest is compounded annually. We must find the amount A after 2 years. Concept / Approach: For annual compounding, the amount after t years is A = P * (1 + r/100)^t. Here, r = 3 and t = 2, so we compute A = 400 * (1.03)^2. Because the time period is short and the rate low, the calculation is straightforward and can be done exactly. We do not need to separately compute the interest and then add it; the formula directly gives the final balance. Step-by-Step Solution: Use A = P * (1 + r/100)^t. Substitute P = 400, r = 3, t = 2. A = 400 * (1.03)^2. Compute (1.03)^2 = 1.0609. Therefore, A = 400 * 1.0609 = 424.36. So Simon's account balance after 2 years will be $424.36. Verification / Alternative check: We can confirm by computing year by year. After the first year, interest = 400 * 3/100 = 12, so the amount becomes 400 + 12 = 412. After the second year, interest is 412 * 3/100 = 12.36, so the final amount is 412 + 12.36 = 424.36. This matches the result from the direct formula, confirming the correctness of the computation. Why Other Options Are Wrong: $524.56 and $545.36 are much too high for a 3% annual rate over only 2 years; they imply very large growth that is unrealistic. $456.36 is also too large compared to the correctly computed $424.36. $400.00 corresponds to zero interest, which contradicts the 3% interest given in the problem. Only $424.36 matches the exact compound interest calculation for the given inputs. Common Pitfalls: Some learners mistakenly use simple interest for both years, adding 12 each year and obtaining 424 instead of 424.36, thus ignoring interest on interest in the second year. Others miscalculate (1.03)^2, approximating it as 1.06 instead of 1.0609, which leads to a slightly smaller final amount. Being careful with the exponentiation and remembering that compound interest applies to the growing balance each year is essential. Final Answer: Simons account balance at the end of 2 years will be $424.36.

Question 14

Jackie deposits $325 in a savings account that pays 4.1% interest per annum, compounded annually. What will be the total amount in her account after 3 full years?

Accepted Answer

Introduction: This problem tests the basic concept of compound interest, where interest is calculated on both the original principal and the accumulated interest from previous periods. The question asks for the total amount in Jackie's account after 3 years when the interest rate is 4.1% per annum compounded annually on an initial deposit of 325 dollars. Given Data / Assumptions: Principal deposited, P = 325 dollars Annual interest rate, r = 4.1% per year Compounding frequency = once per year (annually) Number of years, n = 3 years No additional deposits or withdrawals during the 3 years Concept / Approach: For compound interest compounded annually, the future amount A after n years is found using the standard formula: A = P * (1 + r)^n Here r is the annual interest rate expressed as a decimal. The question asks for the total amount (principal plus interest), not just the interest earned, so we directly compute A using this formula. Step-by-Step Solution: Step 1: Convert the interest rate from percent to decimal. r = 4.1% = 4.1 / 100 = 0.041 Step 2: Substitute P = 325, r = 0.041, n = 3 into the compound amount formula. A = 325 * (1 + 0.041)^3 Step 3: Compute 1 + 0.041. 1 + 0.041 = 1.041 Step 4: Raise 1.041 to the power of 3. 1.041^3 ≈ 1.12829 (rounded to 5 decimal places) Step 5: Multiply this factor by the principal. A ≈ 325 * 1.12829 ≈ 366.64 Step 6: Round to the nearest cent (two decimal places). A ≈ 366.64 dollars Verification / Alternative check: We can also compute year by year: End of Year 1: A1 = 325 * 1.041 ≈ 338.33 End of Year 2: A2 = 338.33 * 1.041 ≈ 352.19 End of Year 3: A3 = 352.19 * 1.041 ≈ 366.64 This matches the value from the direct formula, confirming that 366.64 dollars is correct. Why Other Options Are Wrong: $346.64: This corresponds to applying interest incorrectly or for fewer compounding periods, underestimating growth. $356.64: Slightly closer, but still less than the correct compound growth over 3 years at 4.1%. $376.64: This overestimates the accumulated amount, as if the rate or the number of years were higher. $386.64: This significantly overestimates the amount, not matching the correct compound interest calculation. Common Pitfalls: Students often forget to convert the percentage rate into decimal form or mistakenly multiply the principal by (1 + 3r) instead of using (1 + r)^3, which would be simple interest logic. Another common mistake is to calculate only the interest earned and forget to add the principal, even though the question explicitly asks for the total amount in the account. Final Answer: Thus, the total amount in Jackie's account after 3 years at 4.1% per annum compounded annually is $366.64.

Question 15

A sum of $20,000 is invested at a fixed annual compound interest rate so that it becomes $100,000 in 15 years. What is the annual rate of interest (per annum) that produces this growth?

Accepted Answer

Introduction: This question checks understanding of how to work backwards with the compound interest formula. Instead of finding the future amount from a given interest rate, we are given both the initial amount and the future amount and asked to determine the annual compound interest rate that transforms 20,000 dollars into 100,000 dollars in 15 years. Given Data / Assumptions: Present value, P = 20,000 dollars Future value, A = 100,000 dollars Number of years, n = 15 Interest is compounded annually We assume a constant annual interest rate r over the entire period Concept / Approach: The standard compound interest formula for an amount A after n years is: A = P * (1 + r)^n Here r is the annual interest rate in decimal form. To find r, we rearrange the formula: (1 + r)^n = A / P 1 + r = (A / P)^(1 / n) r = (A / P)^(1 / n) - 1 Then r is converted to a percentage by multiplying by 100. Step-by-Step Solution: Step 1: Compute the ratio A / P. A / P = 100000 / 20000 = 5 Step 2: Use the formula for 1 + r. 1 + r = 5^(1 / 15) Step 3: Evaluate 5^(1 / 15) using approximate calculation. 5^(1 / 15) ≈ 1.1133 Step 4: Subtract 1 to get r in decimal form. r ≈ 1.1133 - 1 = 0.1133 Step 5: Convert r to a percentage. r% ≈ 0.1133 * 100 = 11.33% Verification / Alternative check: We can verify by plugging r = 11.33% back into the compound interest formula: A ≈ 20000 * (1.1133)^15 Using approximate multiplication, (1.1133)^15 is close to 5, hence: A ≈ 20000 * 5 = 100000 which matches the required future amount, so the rate is consistent with the problem statement. Why Other Options Are Wrong: 9.33%: This rate would not grow the principal enough in 15 years; the final amount would be significantly less than 100,000 dollars. 10.33%: This rate gives some growth, but still short of a fivefold increase in 15 years. 11.33%: This is the correct rate, as shown by the calculation. 12.33%: This rate is too high and would make the amount exceed 100,000 dollars in 15 years. 13.33%: This is even higher and would lead to a much larger final amount than required. Common Pitfalls: A common mistake is to treat the growth as simple interest and try to use a linear formula such as A = P(1 + r * n). That would be incorrect here because the problem clearly states compound interest. Another error is failing to apply the 1 / n power when solving for r and instead dividing the amount ratio directly by n. Also, some learners forget to convert r from decimal form into a percentage at the end, or they round too early and lose accuracy. Final Answer: The annual interest rate needed to grow 20,000 dollars to 100,000 dollars in 15 years, compounded annually, is approximately 11.33%.

Question 16

A nominal annual interest rate of 13% is compounded quarterly. What is the corresponding effective annual interest rate to the nearest hundredth of a percent?

Accepted Answer

Introduction: This problem focuses on converting a nominal annual interest rate that is compounded several times a year into its equivalent effective annual rate. Understanding this conversion is important in comparing different financial products that use different compounding frequencies but advertise nominal yearly rates. Given Data / Assumptions: Nominal annual interest rate, r_nominal = 13% per year Compounding frequency: quarterly, that is 4 times per year We want the effective annual rate, r_effective, which represents the total percentage growth over one full year No deposits or withdrawals during the year; we are only interested in the growth factor due to interest Concept / Approach: When a nominal annual rate r_nominal is compounded m times per year, the periodic rate per compounding period is: i = r_nominal / m expressed in decimal form. The effective annual rate r_effective is then: r_effective = (1 + i)^m - 1 This formula accounts for the interest-on-interest effect of multiple compounding periods during the year. Step-by-Step Solution: Step 1: Convert the nominal rate from percent to decimal. r_nominal = 13% = 0.13 Step 2: Determine the quarterly rate i. m = 4 (quarterly compounding) i = r_nominal / m = 0.13 / 4 = 0.0325 Step 3: Compute the effective annual rate using the formula. r_effective = (1 + i)^m - 1 r_effective = (1 + 0.0325)^4 - 1 Step 4: Evaluate the power. (1.0325)^4 ≈ 1.1365 (rounded) Step 5: Subtract 1 to get r_effective in decimal form. r_effective ≈ 1.1365 - 1 = 0.1365 Step 6: Convert to a percentage. r_effective ≈ 0.1365 * 100 = 13.65% Verification / Alternative check: We can approximate by noting that 13% simple interest would give 13% in one year, but because compounding quarterly adds interest four times, the effective rate must be slightly higher than 13%. The computed value of 13.65% is only a little above 13%, which is consistent with expectations for quarterly compounding at this nominal rate. Why Other Options Are Wrong: 14.66%: This is too high for quarterly compounding at a nominal 13% rate. It might correspond to a higher nominal rate or to more frequent compounding. 15.65% and 16.65%: These are much too high and do not match the formula for a 13% nominal rate compounded quarterly. 13.25%: This is closer to a simple adjustment that ignores compounding, such as a minor addition, but it does not follow the correct effective interest rate formula. 13.65%: This matches the exact calculation from the standard effective annual rate formula and is therefore correct. Common Pitfalls: A typical mistake is to forget that the nominal rate must be divided by the number of compounding periods to get the periodic rate. Another common error is to simply add a small percentage to the nominal rate without using the power function, which leads to inaccurate results. Some learners also confuse effective rate with nominal rate and try to divide or multiply percentages directly without using (1 + i)^m - 1. Final Answer: The effective annual interest rate corresponding to a 13% nominal rate compounded quarterly is approximately 13.65%.

Question 17

A bank offers a nominal interest rate of 10% per annum compounded continuously. What is the corresponding effective annual interest rate, correct to two decimal places?

Accepted Answer

Introduction: This question involves continuous compounding, a concept used in higher level finance and mathematics. Instead of compounding monthly or quarterly, continuous compounding assumes interest is added at every instant. The goal is to convert a nominal rate of 10% compounded continuously into an equivalent effective annual rate that represents the actual percentage increase over one full year. Given Data / Assumptions: Nominal annual rate with continuous compounding, r_nominal = 10% per year Interest is compounded continuously, not at discrete intervals We want the effective annual interest rate, r_effective No withdrawals or additional deposits occur during the year Concept / Approach: For continuous compounding, the amount A after time t (in years) with principal P and nominal rate r is given by: A = P * e^(r * t) For one year, t = 1, so: A = P * e^r The effective annual rate r_effective is the overall percentage increase in one year: r_effective = (A - P) / P = e^r - 1 Here e is the mathematical constant approximately equal to 2.71828. Step-by-Step Solution: Step 1: Convert the nominal rate from percent to decimal. r = 10% = 0.10 Step 2: Use the continuous compounding formula for one year. A = P * e^(0.10) Step 3: Express the effective rate as: r_effective = e^0.10 - 1 Step 4: Approximate e^0.10. e^0.10 ≈ 1.1052 Step 5: Subtract 1 to get the decimal effective rate. r_effective ≈ 1.1052 - 1 = 0.1052 Step 6: Convert to a percentage. r_effective ≈ 0.1052 * 100 = 10.52% Verification / Alternative check: As a sense check, we know that with annual compounding at 10%, the effective rate is 10%. With continuous compounding at the same nominal 10%, the effective rate must be slightly higher than 10% but not dramatically larger. The value 10.52% lies just above 10%, which is reasonable and consistent with expectations for continuous compounding at this rate. Why Other Options Are Wrong: 9.52%: This is below the nominal rate and therefore cannot be the effective rate when compounding continuously at 10%. 10.52%: This matches the correct computation using e^0.10 - 1. 11.52%: This is too high for a nominal rate of 10% and would require a larger r value. 12.52%: This is even further from the correct effective rate and does not match the continuous compounding formula. 10.25%: This might come from a rough or incorrect approximation but does not match the precise calculation. Common Pitfalls: Learners sometimes confuse continuous compounding with very frequent discrete compounding and try to use (1 + r / m)^m directly with a large m instead of using e^r. Another frequent error is to substitute r in percent form (10) rather than decimal form (0.10) into the exponent. It is also easy to forget to subtract 1 when converting from the growth factor e^r to the effective interest rate, which would incorrectly suggest the growth factor itself is the rate. Final Answer: The effective annual interest rate corresponding to a nominal 10% per year compounded continuously is approximately 10.52%.

Question 18

An amount of 5,000 currency units is invested at a fixed rate of 8% per annum, compounded annually. What will be the value of this investment after 5 years?

Accepted Answer

Introduction: This is a straightforward compound interest calculation. We are told that 5,000 units of money are invested at 8% per annum, compounded annually, and we need to find the amount at the end of 5 years. This tests a standard application of the compound amount formula with annual compounding. Given Data / Assumptions: Principal, P = 5,000 units Annual interest rate, r = 8% per annum Compounding frequency: annually (once per year) Number of years, n = 5 years No additional deposits or withdrawals are made during the investment period Concept / Approach: For compound interest with annual compounding, the future amount A after n years is: A = P * (1 + r)^n Here r is in decimal form. Since the question asks for the value of the investment after 5 years, we compute A directly using this formula. This includes both the original principal and the accumulated interest. Step-by-Step Solution: Step 1: Convert the interest rate from percent to decimal. r = 8% = 0.08 Step 2: Substitute the known values into the compound amount formula. A = 5000 * (1 + 0.08)^5 Step 3: Compute 1 + 0.08. 1 + 0.08 = 1.08 Step 4: Raise 1.08 to the power of 5. 1.08^5 ≈ 1.46933 (rounded) Step 5: Multiply by the principal. A ≈ 5000 * 1.46933 ≈ 7346.64 Step 6: Round to two decimal places. A ≈ 7346.64 units Verification / Alternative check: We can also compute year by year to confirm: End of Year 1: 5000 * 1.08 = 5400.00 End of Year 2: 5400 * 1.08 = 5832.00 End of Year 3: 5832 * 1.08 ≈ 6298.56 End of Year 4: 6298.56 * 1.08 ≈ 6802.45 End of Year 5: 6802.45 * 1.08 ≈ 7346.64 This stepwise procedure confirms the computed amount is consistent with the annual compounding process. Why Other Options Are Wrong: 8346.00: This value is too high and would correspond to a higher rate or a longer investment period than 5 years at 8%. 3456.00: This is below the principal, so it cannot represent a 5 year investment at a positive interest rate. 4567.00: Again, this is less than the principal and not consistent with compounded growth at 8%. 7000.00: Although closer, this still understates the compound growth that occurs at 8% over 5 years. 7346.64: This matches the exact compound interest calculation and is therefore correct. Common Pitfalls: Some learners confuse simple and compound interest, incorrectly using A = P(1 + r * n). That would underestimate the amount because it does not include interest on interest. Others might substitute 8 instead of 0.08 for the interest rate or forget to raise the factor to the 5th power. Rounding too early at intermediate steps can also slightly distort the final result, so it is best to keep precision until the final rounding stage. Final Answer: The value of the investment after 5 years at 8% per annum compounded annually is 7346.64 units of currency.

Question 19

An investment of $13,200 grows to a compound amount of $22,680.06 in 8 years, with interest compounded annually. What is the annual rate of interest?

Accepted Answer

Introduction: This question asks us to determine the annual interest rate for an investment that grows from 13,200 dollars to 22,680.06 dollars in 8 years with annual compounding. It is a typical reverse compound interest problem where we solve for the rate r instead of the future amount. Given Data / Assumptions: Present value, P = 13,200 dollars Future value, A = 22,680.06 dollars Number of years, n = 8 years Compounding frequency: annually Annual interest rate r is constant over the period Concept / Approach: The compound amount formula is: A = P * (1 + r)^n To find r, we rearrange the formula: (1 + r)^n = A / P 1 + r = (A / P)^(1 / n) r = (A / P)^(1 / n) - 1 Once r is determined in decimal form, we convert it to a percentage. Step-by-Step Solution: Step 1: Compute the ratio A / P. A / P = 22680.06 / 13200 A / P ≈ 1.71819 Step 2: Apply the formula for 1 + r. 1 + r = (1.71819)^(1 / 8) Step 3: Evaluate the 8th root. (1.71819)^(1 / 8) ≈ 1.07 Step 4: Subtract 1 to get r in decimal form. r ≈ 1.07 - 1 = 0.07 Step 5: Convert to a percentage. r ≈ 0.07 * 100 = 7% Verification / Alternative check: We can verify by substituting r = 7% back into the compound interest formula: A = 13200 * (1.07)^8 Compute (1.07)^8: (1.07)^8 ≈ 1.71819 So: A ≈ 13200 * 1.71819 ≈ 22680.06 This matches the target future value given in the question, confirming that the rate of 7% is correct. Why Other Options Are Wrong: 5%: At 5%, the growth factor (1.05)^8 is much smaller, so the amount would not reach 22,680.06 dollars. 6%: This rate gives more growth than 5% but still less than required; (1.06)^8 is still below the needed ratio. 7%: This rate matches the calculation and gives the correct final amount. 8% and 9%: These rates would produce too much growth in 8 years, leading to future values higher than 22,680.06 dollars. Common Pitfalls: One common error is trying to treat the increase as simple interest and using a linear formula instead of exponentiation. Another mistake is performing A / P but then dividing the result by n instead of taking the nth root. Some learners also forget to convert the final decimal into a percentage or round the rate incorrectly, leading to answers that do not match the realistic range suggested by the given options. Final Answer: The annual interest rate that grows 13,200 dollars to 22,680.06 dollars in 8 years with annual compounding is 7% per annum.

Question 20

An amount of $3,300 is required in 4 years at an interest rate of 11% per annum compounded annually. What is the amount of interest earned over 4 years (that is, the difference between the future value and the present value)?

Accepted Answer

Introduction: This question is about finding the present value and then the interest earned when a future amount of 3,300 dollars is needed in 4 years at a compound interest rate of 11% per annum. The key step is to discount the future value back to today and then subtract the present value from the future value to obtain the total interest earned over the period. Given Data / Assumptions: Future value, A = 3,300 dollars (amount needed after 4 years) Annual interest rate, r = 11% per annum Compounding frequency: annually Number of years, n = 4 We want the interest earned, which equals A minus the present value P Concept / Approach: For compound interest, the relationship between present value P and future value A is: A = P * (1 + r)^n To find P from A, we rearrange: P = A / (1 + r)^n Once P is known, the total interest I earned is: I = A - P Step-by-Step Solution: Step 1: Convert the interest rate from percent to decimal. r = 11% = 0.11 Step 2: Compute the discount factor (1 + r)^n. (1 + r)^4 = (1.11)^4 (1.11)^2 ≈ 1.2321 (1.11)^4 ≈ 1.2321 * 1.2321 ≈ 1.5187 Step 3: Calculate the present value P. P = 3300 / 1.5187 ≈ 2173.81 dollars Step 4: Compute the interest earned I. I = A - P = 3300 - 2173.81 ≈ 1126.19 dollars Step 5: Round to two decimal places. I ≈ 1126.19 dollars Verification / Alternative check: We can verify by computing forward from the present value: A = 2173.81 * (1.11)^4 ≈ 2173.81 * 1.5187 ≈ 3300 The small differences are due to rounding, but the result confirms that a present value of about 2173.81 dollars grows to about 3,300 dollars in 4 years. The difference between these amounts, 1126.19 dollars, is the total interest earned. Why Other Options Are Wrong: 1237.00: This overestimates the interest and does not match the correct discounting calculation. 2863.00: This is almost the entire future value and cannot be the amount of interest alone. 1892.00: This is also too large to be only the interest earned for an 11% rate over 4 years. 956.19: This underestimates the interest; it might come from mistaken use of simple interest or a wrong exponent. 1126.19: This matches the precise calculation using the compound interest relationship between present and future values. Common Pitfalls: A common mistake is to calculate simple interest using I = P * r * n, which does not apply here because the question is about compound interest. Another error is forgetting to discount the future value and instead multiplying incorrectly by (1 + r)^n. Careless rounding before subtracting can also slightly distort the value of the interest, so it is important to maintain precision until the final step. Final Answer: The interest earned over 4 years, when a future amount of 3,300 dollars is required at 11% per annum compounded annually, is approximately 1126.19 dollars.

Compound Interest Questions