Mathematics of FinanceMCQPYQ Jan 21Question 1217 of 512
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Which is a better investment 9%\displaystyle 9\% p.a. compounded quarterly or 9.1%\displaystyle 9.1\% p.a. simple interest?

Options

A9%\displaystyle 9\% compounded
B9.1%\displaystyle 9.1\% S.T.
CBoth are same
DCannot be said
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Correct Answer

Option a9%\displaystyle 9\% compounded

All Options:

  • A9%\displaystyle 9\% compounded
  • B9.1%\displaystyle 9.1\% S.T.
  • CBoth are same
  • DCannot be said

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Detailed Solution & Explanation

**Comparison of Investments** To compare the two investments, we calculate their effective annual rates. **Investment 1: 9%\displaystyle 9\% p.a. compounded quarterly** - Nominal rate (r\displaystyle r) = 9%=0.09\displaystyle 9\% = 0.09 - Quarterly rate i=r4=0.094=0.0225\displaystyle i = \frac{r}{4} = \frac{0.09}{4} = 0.0225 per quarter. - Effective annual rate (E1\displaystyle E_1) is: E1=(1+i)41E_1 = (1 + i)^4 - 1 E1=(1.0225)41E_1 = (1.0225)^4 - 1 E11.0930831=9.3083%9.31%E_1 \approx 1.093083 - 1 = 9.3083\% \approx 9.31\% **Investment 2: 9.1%\displaystyle 9.1\% p.a. simple interest** - Effective annual rate (E2\displaystyle E_2) is simply the simple interest rate per year: E2=9.1%E_2 = 9.1\% **Conclusion:** Comparing the two rates, we see that E1=9.31%>E2=9.1%\displaystyle E_1 = 9.31\% > E_2 = 9.1\%. Therefore, the 9%\displaystyle 9\% compounded quarterly investment is a better investment. Hence, **Option A** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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