A company charges 10% per annum compound interest on loan. A sum of ₹2,20,000 is given by the company for a period of 2 years. The company compounded the interest every six months instead of every year. How much money would have been saved by the borrower if the company compounded the interest annually (rounded up to one decimal place)?
Show answer & explanation
Correct answer: A
Explanation
The correct answer is Option 1 i.e. Rs. 1,211.40
When compounded annually -
Principal = Rs. 220000
Rate = 10%
Time = 2 years
Amount = P[1 + R/100]Time = 220000[1 + 10/100]2 = 220000(121/100) = Rs. 266200
Compound Interest = Amount - Principal = 266200 - 220000 = Rs. 46200
When compounded half-yearly -
Principal = Rs. 220000
Rate = 10/2 = 5%
Amount = P[1 + R/100]2Time = 220000[1 + 5/100]4 = 220000(21/20)4 = Rs. 267411.375
Compound Interest = Amount - Principal = 267411.375 - 220000 = Rs. 47411.375
Money would have been saved by the borrower if the company compounded the interest annually = 47411.375 - 46200 = 1211.375 ≈ Rs. 1,211.40