ECONOMICS (CBSE/UGC NET)

ECONOMICS

COMPOUND INTEREST

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Principal:$5000Interest Rate:3.75%Time:25 yearsCompounded MonthlyState the future account balance.
A
$12712.31
B
$12, 749.30
C
$12, 657.59
D
$12550.84
Explanation: 

Detailed explanation-1: -The monthly compound interest formula is used to find the compound interest per month. The formula of monthly compound interest is: CI = P(1 + (r/12) )12t-P where, P is the principal amount, r is the interest rate in decimal form, and t is the time.

Detailed explanation-2: -For this reason, lenders often like to present interest rates compounded monthly instead of annually. For example, a 6% mortgage interest rate amounts to a monthly 0.5% interest rate. However, after compounding monthly, interest totals 6.17% compounded annually.

Detailed explanation-3: -"12% interest compounded monthlyā€¯ means that the interest rate is 12% per year (not 12% per month), compounded monthly. Thus, the interest rate is 1% (12% / 12) per month.

Detailed explanation-4: -Compounded monthly means that the interest rate of the loan is applied in parts each month and the interest is added to the principal. For example, If a loan of $1, 000 has a 12% annual interest rate compounded monthly, that means that in month one, the loan is charged 1% interest and becomes $1, 010.

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