Multiple choice

A certain amount of money is lent out at compound interest at the rate of 20% per annum for two years, compounded annually. It would give Rs. 482 more if the amount is compounded half yearly. Find the principle.

  1. 18000

  2. 17500

  3. 20000

  4. 24700

  5. 25600
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Annual compounding: Amount = P(1.2)² = 1.44P. Half-yearly: Rate = 10% per half-year, Amount = P(1.1)⁴ = 1.4641P. Difference = P(1.4641 - 1.44) = 0.0241P = 482. Therefore P = 482/0.0241 ≈ 20000. The key insight is that more frequent compounding yields higher returns.

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