What is the difference between the compound interest on Rs. 40,000 at 20% per annum compounded half-yearly and compounded quarterly for a period of one year?
Show answer & explanation
Correct answer: D
Explanation
The correct answer is option 4 i.e. Rs. 220.25.
When interest is compounded half yearly, rate becomes half i.e. 20%/2 = 10%
Since in a year there are two half years, interest will be compounded twice.
Compound interest = 40000 × 1.1 × 1.1
When interest is compounded quaterly, rate becomes one-fourth i.e. 20%/4 = 5%
Since in a year there are four quarters, interest will be compounded 4 times.
Compound interest = 40000 × 1.05 × 1.05 × 1.05 × 1.05
Required Difference = 40000 × ((1.1025)2 - (1.1)2)
= Rs. 220.25