Compund Interest Quiz

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Please find our compound interest formulas below for the quiz questions:

Annually compounded interest formula:

annual compounded interest

Half-yearly compounded interest formula:

half-yearly compounded interest

Quarterly compounded interest formula:

Quarterly compounded interest

Compounded interest formula with varying interest rates:

compounded interest formula with varying interest rates

Here, Principal sum = P, Interest = R% per annum, Time = n years

You have an investment proposition in front of you where you would invest 10000 Brittish pounds in a project and after 1 year you can sell the investment. You would earn 5% paid quarterly. How much would you have at the end of year 1?

A. 10500
B. 10550
C. 10559
D. 10509

Answer & Explanation:

Answer: Option D

Explanation: Using the quarterly formula above you will come to 10509.45 i.e.10509.

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If the above investment was paid annually how much less would you receive compared to quarterly compounding??

A. cannot be calculated
B. the same
C. 9
D. 59

Answer & Explanation:

Answer: Option C

Explanation: The answer is 9 as with annual interest you would receive 10500 and with quarterly it is 10509.

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In the above investment proposition, what would you have earnt in interest if you held the investment for 2 years and you reinvested the interest as well annually? The interest rate stays the same.

A. 12025
B. 11025
C. 11000
D. 15000

Answer & Explanation:

Answer: Option B

Explanation: 11025 as 1.05*1.05*100000=11025

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In the above investment things have changed as the interest rate is expected to change in year 2. In year 1 you still earn the same 5% but in year 2 the interest is now 7%. What is the compounded interest you would earn now?

A. 11235
B. 9368
C. 1100
D. 1235

Answer & Explanation:

Answer: Option D

Explanation: The compounded INTEREST you would earn is 1.05*1.07*10000=11235-10000=1235

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In the above investment situation the investment provider is trying to trick you by giving you 2 options. Invest 10000 and receive 3% annually OR invest 10000 and receive 2% quarterly. Which one should you choose if the investment period is 2 years?

A. 3% is obviously more so annually
B. this is too difficult to calculate
C. they are the same in the end
D. 2% paid quarterly

Answer & Explanation:

Answer: Option D

Explanation: Believe it or not but 2% paid quarterly is a lot more valuable. Compounding 2% over 2 years each quarter (8 quarters in 2 years) equals to 4.07%!! The wonderful effect of compounded interest at work here folks!

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