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Example 2.1

If Mr X invests in a saving bank account Rs 1,000 at 5 per cent interest compounded annually. at the end of the first year, he will have Rs, 1.050 in his account. This amount constitutes the principal for earning interest for the next year. At the end of the next year, there would be Rs 1,102.50 in the account. This would represent the principal for the third year. The amount of interest earned would be Rs 55.125. The total amount appearing in his account would be Rs 1,157.625. Table 2.1 shows this compounding procedure:

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