A sum of money is invested at a compound interest of 21% per annum compounded annually for 1 year. An equal sum is invested at 20% per annum compound interest compounded half yearly for 1 year.…
Question and options
A sum of money is invested at a compound interest of 21% per annum compounded annually for 1 year. An equal sum is invested at 20% per annum compound interest compounded half yearly for 1 year. Which of the following statements is correct?
- The investment with annual compounding will give a greater amount.
- The investment with half-yearly compounding will give a greater amount.
- The difference between the two amounts will always be equal to 10% of the principal.
- Both the investments will give the same amount after 1 year.
Answer and explanation
Correct answer: D - Both the investments will give the same amount after 1 year.
Annual: P(1.21). Half-yearly at 20%: 10% per half-year, P(1.1)^2 = 1.21P. The amounts are identical, so neither investment gives more and there is no difference of 10% of the principal.
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