Question 1

At an annual interest rate of 3% compounded monthly, approximately how many years will it take for an investment to double in value?

Accepted Answer

Introduction / Context: Time to double money is a classic compound interest question. It helps you understand how interest rate and compounding frequency affect growth. Here, the interest rate is 3% per annum, but it is compounded monthly, so we must work with a monthly rate and solve for time using the compound interest formula. Given Data / Assumptions: Annual nominal rate = 3% per annum. Compounding frequency = monthly (12 times per year). We want the time needed for the amount to double, that is, final amount = 2 * principal. Compounding is at a constant rate with no deposits or withdrawals. Concept / Approach: For principal P, periodic rate i and n periods, the amount A is given by: A = P * (1 + i)^n Here, we set A = 2P, so: 2P = P * (1 + i)^n This simplifies to (1 + i)^n = 2. We solve for n, then convert the number of months into years by dividing by 12. Step-by-Step Solution: Step 1: Find the monthly rate. Annual nominal rate = 3%, so monthly rate i = 3% / 12 = 0.25% = 0.0025. Step 2: Set up the doubling equation. (1 + 0.0025)^n = 2. Step 3: Take logarithms to solve for n. n = log(2) / log(1.0025). Numerically, n is about 277.6 months. Step 4: Convert months to years. Years = 277.6 / 12 ≈ 23.1 years. Verification / Alternative check: We can quickly test reasonableness. At a small effective annual rate (slightly above 3% because of monthly compounding), the Rule of 72 estimates doubling time ≈ 72 / 3 = 24 years. Our precise calculation of about 23.1 years is close to this rule-of-thumb, so the answer is consistent and reasonable. Why Other Options Are Wrong: 20.1, 21.1, and 22.1 years are all substantially less than both the Rule of 72 estimate and the exact logarithmic solution. They would imply a higher effective interest rate than 3% compounded monthly, so they do not match the given data. Common Pitfalls: A common mistake is to treat 3% as a monthly rate instead of annual, which dramatically understates the time to double. Another is to ignore the compounding and simply apply a simple interest calculation, which is not correct when interest is compounded. Final Answer: It takes approximately 23.1 years to double the money at 3% per annum compounded monthly.

Question 2

Find the principal amount if the compound interest earned at the rate of 10% per annum for 2 years, compounded annually, is Rs. 420.

Accepted Answer

Introduction / Context: This question tests your ability to work backwards from the compound interest amount to the original principal. You are given the interest earned over 2 years at a fixed annual compound rate and must determine how much was originally invested. Given Data / Assumptions: Rate of interest r = 10% per annum. Time t = 2 years. Compound interest (CI) for 2 years = Rs. 420. Compounding is annual (once per year). Principal is denoted by P, and amount by A. Concept / Approach: For annual compounding: A = P * (1 + r/100)^t Compound interest is: CI = A - P We are given CI and r and t, so we first express A in terms of P, then set A - P = 420, and solve for P. For r = 10% and t = 2 years, the amount factor is (1.10)^2 = 1.21. Step-by-Step Solution: Step 1: Write the amount in terms of P. A = P * (1.10)^2 = P * 1.21. Step 2: Express compound interest. CI = A - P = P * 1.21 - P = P * (1.21 - 1) = P * 0.21. Step 3: Use the given CI to find P. P * 0.21 = 420. P = 420 / 0.21 = 2000. Verification / Alternative check: Check the result by recomputing the amount. With P = Rs. 2000: A = 2000 * 1.21 = Rs. 2420. Compound interest = A - P = 2420 - 2000 = Rs. 420, which matches the given CI. Hence, the principal is verified as Rs. 2000. Why Other Options Are Wrong: If P = 2100, CI for 2 years at 10% would be 2100 * 0.21 = 441, not 420. Similarly, for 1900 or 2150, the calculated CI does not equal 420. Only P = 2000 satisfies the condition. Common Pitfalls: Some students mistakenly use the simple interest formula or forget that compound interest for 2 years is not simply 2 * P * r / 100. Others may incorrectly apply the percentage or ignore the power when dealing with (1 + r/100)^t. Always compute the amount correctly and then subtract the principal to get CI. Final Answer: The principal amount is Rs. 2000.

Question 3

Albert invests Rs. 8000 in a fixed deposit scheme for 2 years at compound interest, at a rate of 5% per annum compounded annually. What maturity amount will Albert receive at the end of 2 years?

Accepted Answer

Introduction / Context: This problem is a straightforward application of the compound interest formula to find the maturity amount. The twist is that the computed amount does not match any of the numeric options, so you must be alert enough to choose the 'None of these' option when appropriate. Given Data / Assumptions: Principal P = Rs. 8000. Rate of interest r = 5% per annum. Time t = 2 years. Compounding frequency = annually (once per year). We are asked for the final maturity amount A after 2 years. Concept / Approach: For annual compounding: A = P * (1 + r/100)^t We substitute P = 8000, r = 5 and t = 2. The factor (1 + r/100) is 1.05, so we square 1.05 for 2 years, then multiply by the principal to get the amount. Step-by-Step Solution: Step 1: Compute the amount factor. (1 + r/100) = 1 + 5/100 = 1.05. Step 2: Apply the time period of 2 years. (1.05)^2 = 1.05 * 1.05 = 1.1025. Step 3: Find the maturity amount. A = 8000 * 1.1025 = Rs. 8820. Verification / Alternative check: We can also compute year by year. End of year 1: interest = 8000 * 5% = 400, amount = 8000 + 400 = 8400. End of year 2: interest = 8400 * 5% = 420, amount = 8400 + 420 = 8820. This matches the earlier calculation, confirming that the correct maturity amount is Rs. 8820. Why Other Options Are Wrong: Rs. 8840, Rs. 8800, and Rs. 8810 are close but do not equal the mathematically correct value of Rs. 8820. Since none of the numeric options equals the computed amount, the only correct choice is 'None of these'. Common Pitfalls: Some candidates may round incorrectly or miscompute the second year interest by mistakenly using the original principal instead of the first year amount. Others may be tempted to pick the nearest value, but in competitive exams, you must choose exactly the correct answer, which in this case is the 'None of these' option. Final Answer: Albert will receive Rs. 8820, so the correct option is None of these.

Question 4

An article currently costs Rs. 50. If the rate of inflation is 300% per year (that is, the price becomes four times every year), what will be the cost of this article after 2 years, assuming the same rate of inflation continues?

Accepted Answer

Introduction / Context: This question uses the idea of compound growth to model inflation. A rate of 300% per year does not mean adding three times the amount; it means the price increases by 300% of its current value, making the new price four times the old price each year. We must find the price after two such yearly increases. Given Data / Assumptions: Current cost of the article = Rs. 50. Inflation rate = 300% per year. Effective yearly multiplication factor = 1 + 300% = 4. Time period = 2 years. Inflation is assumed to compound annually at the same rate. Concept / Approach: When values grow at a fixed percentage rate, they follow the compound interest pattern: Future value = Present value * (1 + rate)^time Here rate is 300% per year, so the factor is 4 per year. Over 2 years, we multiply by 4 twice, or more compactly by 4^2. Step-by-Step Solution: Step 1: Determine the yearly factor. 1 + 300% = 1 + 3.00 = 4. So each year the price becomes 4 times the previous price. Step 2: Apply the factor for 2 years. After 1 year: Price = 50 * 4 = Rs. 200. After 2 years: Price = 200 * 4 = Rs. 800. Equivalently, price after 2 years = 50 * 4^2 = 50 * 16 = Rs. 800. Verification / Alternative check: You can check reasonableness. A 100% increase would double the price each year. A 300% increase is even steeper, so after 2 years the price must be far more than 50 * 2^2 = 200. Our result of 800 fits this expectation and matches the calculation exactly. Why Other Options Are Wrong: Rs. 200 is only the price after 1 year, not 2 years. Rs. 600 and Rs. 1000 do not correspond to any correct application of a 4 times yearly factor for an initial value of 50. Only Rs. 800 is consistent with compounding at 300% per year for 2 years. Common Pitfalls: Some students confuse 300% with a factor of 3 instead of 4, giving 50 * 3^2 = 450. Others treat 300% as a simple rise of Rs. 150 per year, which ignores compounding and leads to 50 + 150 * 2 = 350. Always convert percentage growth into a multiplicative factor and apply it repeatedly for each time period. Final Answer: The cost of the article after 2 years will be Rs. 800.

Question 5

The compound interest earned in 2 years at 12% per annum, compounded annually, is Rs. 10,176. What is the original sum (principal) invested, in rupees?

Accepted Answer

Introduction / Context: This problem asks you to find the principal when the compound interest earned over a known period at a given rate is provided. It is a reverse application of the standard compound interest formula and is common in bank deposit and loan questions. Given Data / Assumptions: Rate of interest r = 12% per annum. Time t = 2 years. Compound interest for 2 years = Rs. 10,176. Compounding is annual. Principal is P, amount is A. Concept / Approach: For annual compounding: A = P * (1 + r/100)^t Compound interest is: CI = A - P Given CI and the rate and time, we first write A in terms of P, then equate A - P to 10,176 and solve for P. For r = 12% and t = 2 years, the factor (1 + r/100)^2 becomes (1.12)^2 = 1.2544. Step-by-Step Solution: Step 1: Express A in terms of P. A = P * (1.12)^2 = P * 1.2544. Step 2: Express CI in terms of P. CI = A - P = P * 1.2544 - P = P * (1.2544 - 1) = P * 0.2544. Step 3: Use the given CI to solve for P. P * 0.2544 = 10,176. P = 10,176 / 0.2544 = 40,000. Verification / Alternative check: Check by recomputing the amount and interest. With P = Rs. 40,000: A = 40,000 * 1.2544 = Rs. 50,176. Compound interest = A - P = 50,176 - 40,000 = Rs. 10,176, matching the given value. Hence, the principal is correct. Why Other Options Are Wrong: If P were 50,000, CI for 2 years at 12% would be 50,000 * 0.2544 = 12,720. For 60,000 it would be 15,264, and for 80,000 it would be 20,352. None of these equals 10,176, so those options can be eliminated. Common Pitfalls: A common mistake is to treat the 2-year interest as simple interest and calculate CI = P * r * t / 100, which is incorrect. Others may square 12 instead of 1.12 or mis-handle the subtraction step when finding CI from A. Always convert the percentage correctly and square the growth factor, not the rate itself. Final Answer: The principal amount invested was Rs. 40,000.

Question 6

You deposit $8,000 into an account paying 7% nominal annual interest compounded quarterly. Approximately how many years will it take for the account balance to reach $12,400?

Accepted Answer

Introduction / Context: This question involves growth of an investment with quarterly compounding. You are given the initial deposit, the nominal annual rate and the target amount. The task is to determine approximately how long it takes to reach that target, which requires solving the compound interest equation for time. Given Data / Assumptions: Principal P = $8,000. Target amount A = $12,400. Nominal annual interest rate = 7% per annum. Compounding frequency = quarterly, that is 4 times per year. No additional deposits or withdrawals occur. Concept / Approach: For nominal annual rate r, compounded m times per year, periodic rate i is r / m. The amount after n periods is: A = P * (1 + i)^n Here, i = 0.07 / 4 and n is the number of quarters. We set A = 12,400 and solve for n. Then, number of years = n / 4. Step-by-Step Solution: Step 1: Compute the quarterly rate. i = 7% / 4 = 1.75% per quarter = 0.0175. Step 2: Set up the compound interest equation. 12,400 = 8,000 * (1.0175)^n. (1.0175)^n = 12,400 / 8,000 = 1.55. Step 3: Solve for n using logarithms. n = log(1.55) / log(1.0175) ≈ 25.26 quarters. Step 4: Convert quarters to years. Years = 25.26 / 4 ≈ 6.3 years. Verification / Alternative check: We expect a little less than double, and at roughly 7% per year with quarterly compounding, the doubling time will be near 10 years. Reaching 1.55 times (not full doubling) should take somewhat over half of that, around 6 to 7 years. The computed value of about 6.3 years therefore makes sense. Why Other Options Are Wrong: 2.3, 3.3, and 4.3 years are too short. At 7% nominal, there is not enough time in those options for $8,000 to grow to $12,400. Calculations show the balance would still be well below the target in those time frames. Common Pitfalls: Typical mistakes include using 7% as the quarterly rate instead of dividing by 4, or using simple interest instead of compound interest. Others forget to convert the number of quarters back into years, leading to misinterpretation of the numeric answer. Final Answer: It will take approximately 6.3 years for $8,000 to grow to $12,400 at 7% compounded quarterly.

Question 7

A $10,000 face value strip bond has 15 years remaining until maturity. If the prevailing market rate of return is 6.5% per annum compounded semiannually, what is the fair present market value (price) of this strip bond?

Accepted Answer

Introduction / Context: A strip bond (zero coupon bond) pays no periodic coupons. Instead, the investor receives a single lump sum equal to the face value at maturity. The fair price today is the present value of that future payment discounted at the market yield, taking into account the compounding frequency. Given Data / Assumptions: Face value (future value) F = $10,000. Time to maturity t = 15 years. Market rate of return r = 6.5% per annum nominal, compounded semiannually. Compounding frequency m = 2 times per year. We are pricing a zero coupon bond, so there are no intermediate cash flows. Concept / Approach: For a nominal rate r compounded m times per year, periodic rate i = r / m. The number of compounding periods n = m * t. The present value PV of a future amount F is: PV = F / (1 + i)^n We plug in F = 10,000, i = 0.065 / 2 and n = 2 * 15 = 30. Step-by-Step Solution: Step 1: Find the periodic rate. i = 6.5% / 2 = 3.25% per half year = 0.0325. Step 2: Find the total number of periods. n = 15 years * 2 = 30 semiannual periods. Step 3: Apply the present value formula. PV = 10,000 / (1.0325)^30. Numerically, this is approximately PV ≈ $3,830.88. Verification / Alternative check: You can check the reasonableness: over 15 years at roughly 6.5% compounded semiannually, the future value of $3,830.88 would grow to about $10,000. This is consistent with the concept that the present value is the discounted equivalent of the future payment at the market yield. Why Other Options Are Wrong: $3,710.29 and $3,500.00 are too low and would correspond to higher effective yields than 6.5%, making the bond underpriced relative to the stated market rate. $4,000.00 is too high and would imply a lower yield than 6.5%. Only $3,830.88 matches the correct discounting at 6.5% compounded semiannually. Common Pitfalls: Students sometimes discount using simple interest or forget to adjust the annual rate for the semiannual compounding, using 6.5% per period instead of 3.25%. Others mistakenly treat the bond as if it pays coupons, though the word 'strip' indicates a single lump sum at maturity. Always match the compounding frequency to the rate and the number of periods. Final Answer: The fair present market value of the strip bond is approximately $3,830.88.

Question 8

A five-year promissory note with a face value of $3,500 bears interest at 11% compounded semiannually. It was sold 21 months after its issue date to yield the buyer 10% compounded quarterly. What amount was paid for the note?

Accepted Answer

Introduction / Context: This is a bond valuation style question involving two different compound interest rates. First, the maturity value of the note is determined using its own contract rate. Then, that future value is discounted back to the sale date using the buyer's required yield, which has a different compounding frequency. Given Data / Assumptions: Face value (principal) = $3,500. Term of the note = 5 years. Contract rate = 11% per annum compounded semiannually. Note is sold 21 months (1.75 years) after issue. Buyer's required yield = 10% per annum compounded quarterly. No interim coupons are removed; we treat the note as accumulating interest at 11% until maturity. Concept / Approach: Step 1: Compute the maturity value F of the note using the 11% semiannual rate for the full 5 years. Step 2: Compute the remaining time from sale date to maturity (5 − 1.75 years). Step 3: Discount the maturity value back for this remaining period at the buyer's 10% nominal rate compounded quarterly. The present value obtained is the fair purchase price. Step-by-Step Solution: Step 1: Maturity value under 11% compounded semiannually. Semiannual rate i1 = 11% / 2 = 5.5% = 0.055. Number of semiannual periods = 5 * 2 = 10. Maturity value F = 3,500 * (1.055)^10 ≈ $5,978.51. Step 2: Time remaining after 21 months. 21 months = 1.75 years, so remaining time = 5 − 1.75 = 3.25 years. With quarterly compounding, quarters n2 = 3.25 * 4 = 13. Quarterly yield rate i2 = 10% / 4 = 2.5% = 0.025. Step 3: Discount F at 10% compounded quarterly for 13 quarters. Price = F / (1.025)^13 ≈ 5,978.51 / (1.025)^13 ≈ $4,336.93. Verification / Alternative check: If the buyer invests $4,336.93 at 10% compounded quarterly for 3.25 years, the value grows to approximately $5,978.51, the maturity amount of the note. Thus the buyer earns exactly the required 10% yield, confirming that this is the correct price. Why Other Options Are Wrong: Paying $5,336 or more would give the buyer a yield lower than 10%, since less discounting is involved. Paying $6,336 or $7,336 would be even worse deals from the buyer's perspective. Only $4,336.93 equates the yield to the required 10% compounded quarterly. Common Pitfalls: Many learners incorrectly discount using the contract rate instead of the buyer's yield, or they forget to convert the times correctly into semiannual and quarterly periods. Another common mistake is treating 21 months as 2 years. Precision in time conversion and proper matching of rate with compounding frequency are crucial. Final Answer: The note was sold for approximately 4336.93 dollars.

Question 9

There is a 50% increase in an amount in 5 years at simple interest. Using the same annual rate, what will be the compound interest on Rs. 12,000 after 3 years, compounded annually?

Accepted Answer

Introduction / Context: This question links simple interest and compound interest. First we deduce the annual simple interest rate from the given percentage increase over 5 years. Then we use that rate as a compound interest rate to compute the compound interest on a different principal over 3 years. Given Data / Assumptions: An amount increases by 50% in 5 years at simple interest. We need the equivalent annual rate of interest. Principal for the second part = Rs. 12,000. Time for compound interest = 3 years. Compounding is annual in the second part. Concept / Approach: For simple interest: Simple interest SI = P * r * t / 100. A 50% increase over 5 years means SI = 0.5P in 5 years. This allows us to find r. Then, for compound interest: Amount A = P * (1 + r/100)^t, CI = A − P. We then compute CI for P = 12,000 at the found rate for 3 years. Step-by-Step Solution: Step 1: Find the simple interest rate. In 5 years, SI = 50% of P = 0.5P. Using SI formula: 0.5P = P * r * 5 / 100. 0.5 = 5r / 100 → r = 0.5 * 100 / 5 = 10% per annum. Step 2: Use r = 10% as the compound interest rate. Principal for CI = Rs. 12,000, t = 3 years. Amount A = 12,000 * (1.10)^3. (1.10)^3 = 1.331, so A = 12,000 * 1.331 = Rs. 15,972. Step 3: Compute CI on Rs. 12,000. CI = A − P = 15,972 − 12,000 = Rs. 3,972. Verification / Alternative check: We can compute year by year. End of year 1: amount = 12,000 * 1.10 = 13,200. Year 2: amount = 13,200 * 1.10 = 14,520. Year 3: amount = 14,520 * 1.10 = 15,972. The interest earned over 3 years is 15,972 − 12,000 = 3,972, confirming our result. Why Other Options Are Wrong: The other values (5,422; 5,489; 6,145) represent much higher compound interest than is consistent with a 10% rate over 3 years on Rs. 12,000. They would imply different, incorrect interest rates or time periods. Common Pitfalls: Some learners misinterpret the 50% increase over 5 years and compute the annual rate wrongly, for example dividing 50 by 5 without relating it to the simple interest formula. Others forget that the next part is compound interest, not simple interest, and simply apply SI again. Carefully distinguishing between SI and CI is essential. Final Answer: The compound interest on Rs. 12,000 for 3 years at the same rate is Rs. 3972.

Question 10

Compound interest earned on a sum for the second and third years is Rs. 1,200 and Rs. 1,440 respectively. Find the annual rate of interest (per annum). Assume yearly compounding.

Accepted Answer

Introduction / Context: This question uses the relationship between compound interest amounts in successive years to find the rate of interest. When interest is compounded annually at a constant percentage, the interest earned each year forms a geometric progression, with each year's interest equal to the previous year's interest multiplied by (1 + r). Given Data / Assumptions: Interest earned in the 2nd year = Rs. 1,200. Interest earned in the 3rd year = Rs. 1,440. Compounding is annual at a constant rate r% per annum. We are asked to find r. Concept / Approach: Under annual compounding, interest for successive years increases by a factor of (1 + r/100) each year, because each new year's interest is computed on an increased principal (previous principal plus previous interest). Thus: Interest in 3rd year = Interest in 2nd year * (1 + r/100). Taking the ratio of third year interest to second year interest directly reveals (1 + r/100). Step-by-Step Solution: Step 1: Set up the ratio of third year to second year interest. Interest in 2nd year = 1,200. Interest in 3rd year = 1,440. Ratio = 1,440 / 1,200 = 1.2. Step 2: Relate this ratio to the rate. Interest in 3rd year = Interest in 2nd year * (1 + r/100). So, 1 + r/100 = 1.2. Step 3: Solve for r. 1 + r/100 = 1.2 → r/100 = 0.2 → r = 20%. Verification / Alternative check: If the second year interest is 1,200 at 20%, the effective principal at the start of year 2 must be 1,200 / 0.20 = 6,000. At the start of year 3, principal becomes 6,000 + 1,200 = 7,200. Interest in year 3 at 20% is 7,200 * 0.20 = 1,440, which matches the given value, confirming r = 20%. Why Other Options Are Wrong: At 15%, the ratio of successive year interests would be 1.15; at 18% it would be 1.18; at 24% it would be 1.24. None of these match the observed ratio of 1.2 between 1,440 and 1,200. Therefore, only 20% is consistent with the data. Common Pitfalls: Some students try to involve the principal and write multiple equations unnecessarily. Others confuse the difference between interests for different years with the total interest over multiple years. The simplest method is to use the ratio of successive year interests directly to find the rate. Final Answer: The annual rate of interest is 20% per annum.

Question 11

On a certain principal, the simple interest for 2 years is Rs. 2,800 and the compound interest for the same principal, rate and time (2 years, compounded annually) is Rs. 2,996. What is the annual rate of interest?

Accepted Answer

Introduction / Context: This question asks you to use both simple interest and compound interest information to determine the interest rate. Knowing the simple interest for 2 years and the compound interest for 2 years on the same principal offers enough information to solve for the rate without explicitly knowing the principal. Given Data / Assumptions: Simple interest (SI) for 2 years = Rs. 2,800. Compound interest (CI) for 2 years, compounded annually = Rs. 2,996. Principal is P and rate is r% per annum. Time t = 2 years in both cases. Concept / Approach: For simple interest: SI = P * r * t / 100. For 2 years, SI = 2P * r / 100 = 2,800. For compound interest over 2 years: CI = P * (1 + r/100)^2 − P. Also, for 2-year CI, the difference CI − SI equals the interest on the first year's interest: CI − SI = P * r^2 / 100^2. We can use SI to relate P and r, then use CI − SI to solve for r directly. Step-by-Step Solution: Step 1: Write SI equation. SI = 2P * r / 100 = 2,800. So P * r = 2,800 * 100 / 2 = 140,000. Step 2: Write CI − SI equation. CI − SI = 2,996 − 2,800 = 196. Also, CI − SI = P * r^2 / 100^2. So 196 = P * r^2 / 10,000. Step 3: Use P * r = 140,000 to eliminate P. P * r^2 / 10,000 divided by P * r gives (r / 10,000). Hence, r / 10,000 = 196 / 140,000 → r = 196 * 10,000 / 140,000 = 14. Verification / Alternative check: Check with r = 14%. SI for 2 years: SI = 2P * 14 / 100 = 0.28P = 2,800 → P = 10,000. Now CI: Amount A = 10,000 * (1.14)^2 = 10,000 * 1.2996 = 12,996. CI = A − P = 12,996 − 10,000 = 2,996, matching the given CI. Why Other Options Are Wrong: Rates of 7%, 21% or 28% give SI and CI values that do not produce a difference of exactly 196. For example, at 7% the difference CI − SI would be far smaller; at higher rates it would be much larger. Common Pitfalls: A common error is to try to solve for P and r independently without using the simplifying relation between CI − SI and r^2. Another mistake is miscomputing the difference CI − SI or forgetting to square r when using the formula for CI − SI over 2 years. Final Answer: The annual rate of interest is 14 percent.

Question 12

If the difference between the compound interest and the simple interest on a certain sum at the rate of 5% per annum for 2 years is Rs. 20, then what is the principal (sum invested)? Assume annual compounding for compound interest.

Accepted Answer

Introduction / Context: This question again uses the relationship between simple interest and compound interest on the same principal, rate and time. The difference between CI and SI over 2 years has a compact formula and allows us to solve quickly for the principal when the rate and difference are known. Given Data / Assumptions: Rate of interest r = 5% per annum. Time t = 2 years. Difference between compound interest and simple interest = Rs. 20. Interest is compounded annually for CI. Principal P must be determined. Concept / Approach: For 2 years, the difference between CI and SI is: CI − SI = P * (r^2 / 100^2). This arises because CI for 2 years equals SI for 2 years plus interest on the first year's interest. Substituting r and the known difference allows direct solution for P. Step-by-Step Solution: Step 1: Write the difference formula. CI − SI = P * r^2 / 100^2. Given CI − SI = 20 and r = 5. Step 2: Substitute values. 20 = P * 5^2 / 100^2. 5^2 = 25 and 100^2 = 10,000. So 20 = P * 25 / 10,000. Step 3: Solve for P. P = 20 * 10,000 / 25. P = 200,000 / 25 = 8,000. Verification / Alternative check: Check explicitly. SI for 2 years: SI = P * r * t / 100 = 8,000 * 5 * 2 / 100 = 800. CI amount: A = 8,000 * (1.05)^2 = 8,000 * 1.1025 = 8,820. CI = 8,820 − 8,000 = 820. Difference CI − SI = 820 − 800 = 20, matching the given difference. Why Other Options Are Wrong: For a principal of 2,000, 4,000 or 6,000, the difference CI − SI at 5% for 2 years would be 5, 10 and 15 respectively, not 20. Therefore those options are inconsistent with the problem data. Common Pitfalls: Some learners misapply the simple interest formula or forget that the difference formula uses r^2 / 100^2. Others attempt long methods by setting up full SI and CI equations instead of using the shortcut. Using the standard relationship saves time and reduces calculation errors. Final Answer: The principal (sum invested) is Rs. 8000.

Question 13

Find the compound interest on Rs. 7,500 at 4% per annum for 2 years, if the interest is compounded annually.

Accepted Answer

Introduction / Context: This is a straightforward computation of compound interest for a given principal, rate and time with annual compounding. You simply apply the compound interest formula, then subtract the principal to find the interest earned. Given Data / Assumptions: Principal P = Rs. 7,500. Rate of interest r = 4% per annum. Time t = 2 years. Compounding is annual. We are asked to find the compound interest (CI) only, not the total amount. Concept / Approach: For annual compounding: Amount A = P * (1 + r/100)^t. Compound interest: CI = A − P. We first compute the amount factor (1 + 4/100)^2, multiply it by the principal to get A, and then subtract P to obtain CI. Step-by-Step Solution: Step 1: Compute the yearly factor. 1 + r/100 = 1 + 4/100 = 1.04. Step 2: Apply the factor for 2 years. (1.04)^2 = 1.04 * 1.04 = 1.0816. Step 3: Compute the amount A. A = 7,500 * 1.0816 = Rs. 8,112. Step 4: Compute the compound interest. CI = A − P = 8,112 − 7,500 = Rs. 612. Verification / Alternative check: Compute year by year. Year 1: interest = 7,500 * 4% = 300; amount = 7,500 + 300 = 7,800. Year 2: interest = 7,800 * 4% = 312; amount at end of year 2 = 7,800 + 312 = 8,112. Total interest = 300 + 312 = 612, confirming the earlier result. Why Other Options Are Wrong: Values such as 512, 515 and 522 are all below the true compound interest of 612. They may arise if someone mistakenly computes simple interest (which would give 7,500 * 4 * 2 / 100 = 600) and then adjusts slightly, but they do not match the exact result from correct compounding. Common Pitfalls: Some students forget to apply the interest on the increased amount in the second year and simply double the first year's interest. Others round too early in the calculation. It is important to either use the formula directly or compute interest year by year carefully. Final Answer: The compound interest on Rs. 7,500 for 2 years at 4% per annum is Rs. 612.

Question 14

In what time (in years) will Rs. 1,000 amount to Rs. 1,331 at 10% per annum, if interest is compounded annually?

Accepted Answer

Introduction / Context: This question asks for the time required for a given principal to grow to a specific amount at a fixed compound interest rate. Recognising standard powers of (1 + r) can make the solution very quick, especially when the numbers are neat, as in this case. Given Data / Assumptions: Principal P = Rs. 1,000. Amount A = Rs. 1,331. Rate of interest r = 10% per annum. Compounding is annual. We must find time t in years. Concept / Approach: For annual compounding: A = P * (1 + r/100)^t. Substitute P, A and r, then solve for t. Here r = 10%, so (1 + r/100) = 1.10. We look for t such that: 1,331 / 1,000 = (1.10)^t. The left side is 1.331, and we check powers of 1.10 to see which matches. Step-by-Step Solution: Step 1: Express the equation. 1,331 = 1,000 * (1.10)^t. So (1.10)^t = 1,331 / 1,000 = 1.331. Step 2: Recognise standard values. Compute 1.10^2 = 1.21 (too small). Compute 1.10^3 = 1.331, which matches exactly. Therefore, t = 3 years. Verification / Alternative check: Calculate year by year. End of year 1: amount = 1,000 * 1.10 = 1,100. End of year 2: amount = 1,100 * 1.10 = 1,210. End of year 3: amount = 1,210 * 1.10 = 1,331. This confirms that it takes exactly 3 years to reach Rs. 1,331. Why Other Options Are Wrong: At 2 years, the amount is only Rs. 1,210. At 4 years, the amount would be 1,000 * 1.10^4 = 1,464.1, which is higher than 1,331. At 5 years, it would be even larger. Thus only t = 3 years produces the given final amount. Common Pitfalls: Some students treat the growth as simple interest and solve 1,331 = 1,000 * (1 + 0.10t), which would give a non-integer time. Others use logarithms unnecessarily for such neat numbers. Always check first if the ratio A / P matches a known power of (1 + r/100) before resorting to more complex methods. Final Answer: Rs. 1,000 will amount to Rs. 1,331 in 3 years at 10% compound interest per annum.

Question 15

Determine the nominal annual rate of interest, convertible quarterly, if the periodic interest rate is 1.75% per quarter.

Accepted Answer

Introduction / Context: This question is about converting a periodic interest rate into its corresponding nominal annual rate. In financial mathematics, nominal annual rate is the stated yearly rate that is associated with a given compounding frequency, such as quarterly, monthly or semiannually. Given Data / Assumptions: Periodic rate per quarter = 1.75%. Compounding frequency = quarterly (4 times per year). We need the nominal annual rate of interest, convertible quarterly. Concept / Approach: For a nominal annual rate R (convertible m times per year), the periodic rate i is: i = R / m. Conversely, if we know i and m, we can recover R: R = i * m. Here, i is given as 1.75% per quarter and m = 4. Step-by-Step Solution: Step 1: Identify i and m. i = 1.75% per quarter. m = 4 quarters per year. Step 2: Compute the nominal annual rate. R = i * m = 1.75% * 4. R = 7% per annum (nominal, convertible quarterly). Verification / Alternative check: We can check whether this makes sense. A nominal 7% annual rate compounded quarterly corresponds to a periodic rate of 7% / 4 = 1.75%, which matches the given periodic rate. Therefore, the conversion is consistent. Why Other Options Are Wrong: An 8% nominal rate would imply a quarterly rate of 2%, not 1.75%. Similarly, 9% or 10% nominal would correspond to even higher periodic rates. Only 7% nominal produces the given quarterly rate of 1.75%. Common Pitfalls: A common misunderstanding is to confuse nominal and effective annual rates. Some may incorrectly compound 1.75% four times and call that the nominal rate. In fact, that would give the effective annual rate. Here, the question specifically asks for the nominal annual rate, which is simply periodic rate multiplied by the number of periods per year. Final Answer: The nominal annual rate of interest (convertible quarterly) is 7%.

Question 16

In compound interest, what is the difference in rupees between the compound interest on Rs. 1000 for 1 year at 10% per annum when the interest is compounded once yearly and when it is compounded half-yearly?

Accepted Answer

Introduction / Context: This question tests the basic concept of compound interest and how the compounding frequency (yearly versus half-yearly) affects the final interest amount. Even though the rate of interest per annum is the same, changing the number of compounding periods in a year slightly changes the effective interest earned, which is important in banking and finance calculations. Given Data / Assumptions: Principal P = Rs. 1000 Nominal rate of interest r = 10% per annum Time T = 1 year Case 1: Compounded once yearly Case 2: Compounded half-yearly, that is twice in a year Concept / Approach: The compound amount A is calculated using the formula: A = P * (1 + r / (100 * n))^(n * T)where n is the number of compounding periods per year. The compound interest CI is then: CI = A - PWe compute CI for yearly compounding and half-yearly compounding, and then find the difference between the two interest amounts. Step-by-Step Solution: Step 1: For yearly compounding, n = 1.A1 = 1000 * (1 + 10 / 100)^1 = 1000 * 1.10 = 1100CI1 = A1 - P = 1100 - 1000 = Rs. 100Step 2: For half-yearly compounding, n = 2 and rate per half-year = 10 / 2 = 5%.A2 = 1000 * (1 + 5 / 100)^(2 * 1) = 1000 * (1.05)^2 = 1000 * 1.1025 = 1102.5CI2 = A2 - P = 1102.5 - 1000 = Rs. 102.5Step 3: Difference between the compound interests:Difference = CI2 - CI1 = 102.5 - 100 = Rs. 2.5 Verification / Alternative check: Notice that for a single year, the difference between yearly and half-yearly compounding will be quite small because there are only two compounding periods. As a quick check, we can also compare the amounts directly: 1102.5 - 1100 = 2.5, which confirms that the difference in compound interest is Rs. 2.5. Why Other Options Are Wrong: 1.5: This would arise from an incorrect calculation or using an approximate rate instead of the exact compounding formula.0.5: This is too small and indicates a misunderstanding of compounding frequency.3.5: This overestimates the effect of compounding for only one year.2.0: This is a rounded guess rather than the exact mathematical result. Common Pitfalls: Students often forget to adjust the rate when the compounding period changes, for example using 10% instead of 5% for each half-year. Another mistake is to subtract the principals incorrectly or compare the wrong quantities (amounts instead of interests, or vice versa). Careful substitution into the compound interest formula avoids these issues. Final Answer: The difference between the compound interest when interest is compounded yearly and half-yearly on Rs. 1000 at 10% per annum for 1 year is Rs. 2.5.

Question 17

If the amounts received at the end of the second and third year on a certain principal at compound interest are Rs. 1800 and Rs. 1926 respectively, what is the annual rate of interest?

Accepted Answer

Introduction / Context: This problem checks your understanding of how consecutive amounts at compound interest are related by the interest rate. When you know the amount at the end of successive years, you can easily find the rate without first finding the principal. This is a common type of question in bank exams and aptitude tests involving compound interest. Given Data / Assumptions: Amount at the end of 2nd year, A2 = Rs. 1800 Amount at the end of 3rd year, A3 = Rs. 1926 Interest is compounded annually Principal is the same for both years We need the annual rate of interest r (in percent) Concept / Approach: Under compound interest with annual compounding, each year the amount multiplies by the factor (1 + r / 100). Therefore, the ratio of the amount at the end of the third year to the amount at the end of the second year is: A3 / A2 = 1 + r / 100From this ratio, we can directly solve for r without computing the principal. Step-by-Step Solution: Step 1: Write the relationship between 2nd and 3rd year amounts.A3 = A2 * (1 + r / 100)Step 2: Substitute the given values A3 = 1926 and A2 = 1800.1926 = 1800 * (1 + r / 100)Step 3: Divide both sides by 1800.1926 / 1800 = 1 + r / 1001926 / 1800 = 1.07Therefore, 1 + r / 100 = 1.07Step 4: Solve for r.r / 100 = 1.07 - 1 = 0.07r = 0.07 * 100 = 7% Verification / Alternative check: As a quick verification, assume an unknown principal P. After 2 years: A2 = P * (1.07)^2. After 3 years: A3 = P * (1.07)^3. Then A3 / A2 = (P * 1.07^3) / (P * 1.07^2) = 1.07, which matches 1926 / 1800 = 1.07. So the rate is indeed 7% per annum. Why Other Options Are Wrong: 7.5% and 6.5%: These correspond to slightly larger or smaller ratios than 1.07 and do not match 1926 / 1800 exactly.6%: This would give 1.06 as the ratio, which is less than 1926 / 1800.8%: This would give 1.08, larger than the correct ratio. Common Pitfalls: Many learners try to find the principal first, which makes the calculation longer. Others mistakenly treat the difference between the amounts (1926 - 1800 = 126) as simple interest, which is incorrect in compound interest problems. The correct method is to use the ratio of consecutive amounts to directly obtain the multiplier and then the rate. Final Answer: The annual rate of compound interest is 7% per annum.

Question 18

At what time period (in years) will a principal of Rs. 25,000 yield Rs. 8,275 as compound interest at 10% per annum compounded annually?

Accepted Answer

Introduction / Context: This question focuses on determining the time period required for a given principal to earn a specified amount of compound interest. It tests your understanding of the compound interest formula and your ability to relate principal, amount, rate, and time in a financial context. Given Data / Assumptions: Principal P = Rs. 25,000 Compound interest earned CI = Rs. 8,275 Rate of interest r = 10% per annum Compounding is done annually We need to find time T in years Concept / Approach: First, compute the final amount A using: A = P + CIThen use the compound interest amount formula: A = P * (1 + r / 100)^TWe know P, r, and A, so we must find T. Because the numbers are neat, T will be an integer, so we can check successive powers of (1.1). Step-by-Step Solution: Step 1: Compute the amount.A = P + CI = 25000 + 8275 = Rs. 33,275Step 2: Use the formula A = P * (1 + 10 / 100)^T.33275 = 25000 * (1.1)^TStep 3: Divide both sides by 25000.33275 / 25000 = (1.1)^T33275 / 25000 = 1.331Step 4: Check powers of 1.1.(1.1)^2 = 1.21 (too small)(1.1)^3 = 1.331 (exact match)Therefore, T = 3 years. Verification / Alternative check: We can verify by directly computing compound interest for 3 years. Amount after 3 years: A = 25000 * (1.1)^3 = 25000 * 1.331 = 33,275The compound interest is: CI = 33,275 - 25,000 = 8,275which matches the given CI, so our answer is consistent. Why Other Options Are Wrong: 2 years: (1.1)^2 = 1.21 gives amount 25,000 * 1.21 = 30,250, interest 5,250, not 8,275.4 years: (1.1)^4 = 1.4641 gives too large an amount.5 or 6 years: These produce even higher amounts and much larger interest, so they do not match the given CI. Common Pitfalls: Students sometimes confuse simple interest with compound interest and try to use linear calculations (P * r * T / 100). Another mistake is not adding the interest to the principal to find the amount before using the compound interest formula. Systematically checking powers of (1 + r / 100) helps avoid algebraic errors when the answer is a small integer number of years. Final Answer: The required time for Rs. 25,000 to earn Rs. 8,275 as compound interest at 10% per annum is 3 years.

Question 19

Albert invests an amount of Rs. 8000 in a fixed deposit scheme for 2 years at compound interest at the rate of 5% per annum. What amount will he receive on maturity of this fixed deposit?

Accepted Answer

Introduction / Context: This question is a straightforward application of the compound interest formula for a fixed deposit scheme. It checks your ability to compute the maturity amount when the principal, rate of interest, time period, and compounding frequency are clearly given. Such problems are very common in bank exams and basic financial mathematics. Given Data / Assumptions: Principal P = Rs. 8000 Rate of interest r = 5% per annum Time T = 2 years Compounding is annual We need to calculate the amount (maturity value) after 2 years Concept / Approach: The amount A at compound interest for annual compounding is given by: A = P * (1 + r / 100)^TAfter finding the amount, we do not need to separately calculate the interest because the amount already includes principal plus interest. Here all values are simple, so direct substitution gives the answer. Step-by-Step Solution: Step 1: Write the formula.A = 8000 * (1 + 5 / 100)^2Step 2: Simplify the rate term.1 + 5 / 100 = 1 + 0.05 = 1.05Step 3: Square the factor.(1.05)^2 = 1.1025Step 4: Multiply by the principal.A = 8000 * 1.1025 = Rs. 8820 Verification / Alternative check: We can verify year by year. At the end of the first year: Amount after year 1 = 8000 + 5% of 8000 = 8000 + 400 = 8400At the end of the second year, interest is 5% on 8400: Interest for year 2 = 5% of 8400 = 0.05 * 8400 = 420Amount after year 2 = 8400 + 420 = Rs. 8820This matches the formula based answer. Why Other Options Are Wrong: Rs. 8600 and Rs. 8500: These ignore the effect of interest in the second year on both principal and first year interest.Rs. 8830: Slightly higher, probably due to rounding errors or using an incorrect rate.Rs. 8800: A rounded guess rather than the exact computed value. Common Pitfalls: Learners sometimes treat this as simple interest and compute 5% for 2 years on the original principal only, which would give 8000 + 800 = 8800. Another error is forgetting to square the factor (1.05) for 2 years. Remember that with compound interest, each year the amount multiplies again by (1 + r / 100). Final Answer: The maturity amount Albert receives from the fixed deposit is Rs. 8820.

Question 20

The simple interest on a certain sum of money at 5% per annum for 3 years is Rs. 1200. What is the compound interest on the same sum for the same period at the same rate of 5% per annum, compounded annually?

Accepted Answer

Introduction / Context: This question connects simple interest and compound interest on the same principal, rate, and time. It checks whether you can first extract the principal from simple interest data and then correctly use the compound interest formula. This is a typical multi-step aptitude question involving interest calculations. Given Data / Assumptions: Simple interest SI = Rs. 1200 Rate r = 5% per annum Time T = 3 years Principal P is unknown Compound interest is compounded annually at the same rate and for the same period Concept / Approach: First, we use the simple interest formula: SI = P * r * T / 100to find the principal P. Then we use the compound interest amount formula: A = P * (1 + r / 100)^TFinally, the compound interest CI is: CI = A - P Step-by-Step Solution: Step 1: Find the principal using simple interest.1200 = P * 5 * 3 / 1001200 = P * 15 / 100P = 1200 * 100 / 15 = Rs. 8000Step 2: Compute the amount at compound interest for 3 years.A = 8000 * (1 + 5 / 100)^3A = 8000 * (1.05)^3(1.05)^3 = 1.157625A = 8000 * 1.157625 = Rs. 9261Step 3: Compute compound interest.CI = A - P = 9261 - 8000 = Rs. 1261 Verification / Alternative check: You can expand year by year: after year 1, amount = 8000 * 1.05 = 8400; after year 2, amount = 8400 * 1.05 = 8820; after year 3, amount = 8820 * 1.05 = 9261. The difference 9261 - 8000 is 1261, which confirms our earlier calculation. Why Other Options Are Wrong: Rs. 1251, Rs. 1271, Rs. 1281: These come from incorrect rounding or wrong multiplication of (1.05)^3.Rs. 1240: This is close to the simple interest and indicates confusion between simple and compound interest. Common Pitfalls: Common mistakes include using the simple interest formula again for the second part, or forgetting to find the principal first. Another frequent error is computing (1.05)^3 incorrectly or rounding too early in intermediate steps. Always keep sufficient decimal precision until the final step to ensure the correct result. Final Answer: The compound interest on the same sum for 3 years at 5% per annum is Rs. 1261.

Compound Interest Questions