Question

Mr Paul had deposited 5,000 in a bank at 12% interest per annum. After 3 1/2 years, he
withdraws this amount. Out of this money, he wants to buy an almirah costing 9,500.
How much more money does he need?​

Answer 1

In year 1, 10% simple interest is 500 Rs.

In year 2, it's semiannual, compounded. The more frequent the compounding, the higher the yield.

So in year 2, the 1st 6 months produce 5%, ie 250 Rs interest.

In the 2nd 6 months, it's 5% on 5,250, not 5% on 5,000.

5% on 5,250 Rs is 262.50.

So the total interest for year 2, is 250 + 262.50= 512.50 Rs.

Year 2 is 12.50 Rs higher than year 1 because of semiannual compounding instead of annual compounding.

For purposes of explanation, to compare apples to apples, I did not treat year 2 as starting with the interest accrued during year 1.