Question

A person deposited Rs. 80,000 in bank 'P' for 2 years at the rate of 10% annual compound interest. But after one year bank has changed the policy and decided to pay semi-annual compound interest at the same rate. What is the percentage difference between compound interests of the first year and second year? Give reason with calculation:​

Answer 1

compound interest in year 2 is 12.75% than compound interest in year 1. This is because semi annual compounding yield a higher compound interest

Explanation:

compound interest = future value - present value

The formula for calculating future value:

FV = P (1 + r/m)^nm

FV = Future value

P = Present value

R = interest rate

N = number of years

m = number of compounding

compound value in the first year = 80,000(1.1)^1 = 88,000

compound interest = 88,000 - 80,000 = 8,000

compound interest in the second year = 88,000(1 + 0.01/2)^2 = 97,020

compound interest = 97,020 - 88,000 = 9020

Percentage change = (9020 / 8,000) - 1 = 12.75%