Question

Calculate the compound interest on rupees 20000 at 15% per annum in 2 and 1/4 of years​

Answer 1

Answer:

Use following formula in Excel

=FV(15%,(2+1/3),,-20000)-20000

= 7711.39

Compounding formula calculation

=20000*(1+15%)^(2+1/3)-20000

= 7711.39

For pen and paper calculation - This will be slightly different result as compounding period is fractional. All results match when compounding period is full. Hence, they will match for 1 year, 2 years,…..5 years and so on. But they won’t match when compounding period is fractional such as 4 years 5 months.

First year interest = 20000*15% = 3000

First year principal + interest = 20000+3000 = 23000

Second year interest = 23000*15% = 3450

Second year end principal + interest = 23000+3450 = 26450

For 1/3 year, interest = 26450*15%*1/3 = 1322.5

Total = 26450+1372.5 = 27772.5

Interest = 27772.5–20000 = 7772.5

Hence, there is a difference of 7772.5 - 7711.39 = 61.11

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