Compund Interest Questions and Answers

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Please find our compound interest formulas below:

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 25000 dollars in a project and after 10 years you can sell the investment. You would earn 5% paid annually. How much would you have at the end of year 10?

A. 47000
B. 57253
C. 40722
D. 31233

Answer & Explanation:

Answer: Option C

Explanation: Use the annual formula above to come to the answer. 1.05^10*25000

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In the above investment you are given the option to receive the interest compounded half-yearly as well. How much would you now have after year 10?

A. the same
B. half the yearly interest
C. 44965
D. 40965

Answer & Explanation:

Answer: Option D

Explanation: Use the half yearly formula above to come to the answer. 5/2=2.5% 1.025^20*25000=40965

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What if in the investment above you could receive the interest quarterly? How much interest would you have accumulated after 10 years?

A. 16090
B. 15010
C. 21030
D. 15965

Answer & Explanation:

Answer: Option A

Explanation: 5/4=1.25% 1.0125^40*25000-25000=16090

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The investment provider is going all out! He is offering you monthly compounded interest payments. What would your principal plus interest be at the end of year 10 now?

A. 41995
B. 41175
C. 39655
D. 55635

Answer & Explanation:

Answer: Option B

Explanation: Use the annual formula above again but as we have monthly interest we divide the annual interest rate by 12 months and we also multiply n=10 years by 12 months so we have 120. So now we have 25000*((1+(5%/12)))^(10*12)=41175.

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How much more interest + principal in total percentage wise would you receive when you compare the annual to the monthly compounded?

A. Same as above 106090
B. 106720
C. 106136
D. 108010

Answer & Explanation:

Answer: Option C

Explanation: Monthly was 41175 and annual was 40722 with a difference of 453. 453/40722=1.11% more just by choosing to receive the interest more frequently.

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