Question

Arif took a loan of Rs.80,000 from a bank. If the rate of interest is $10%$ per annum, find the difference in amounts he would be paying after $1\dfrac{1}{2}$ years if the interest is:
A) Compounded annually.
B) Compounded half yearly.

Answer 1

Hint: The given question is based on compound interest. Try to recall the formulae related to compound interest, where the interest is compounded annually as well as half yearly.

Complete step-by-step answer:
Before proceeding with the problems, we must know the formula used in compound interest.
The formula for compound interest is given as $A=P{{\left( 1+\dfrac{r}{100} \right)}^{n}}$, where $A=$ Amount after $n$ compounding, $P=$ principal amount, $r=$ rate of interest, $n=$ number of times the interest is compounded in the given time.
If $T$ is the total time for which interest is to be calculated, then:
1) $n=T$, if the interest is compounded annually.
2) $n=2T$, if the interest is compounded half-yearly
3) $n=4T$, if the interest is compounded quarterly.
While solving the problem, we will also consider the fact that when the interest is compounded half-yearly, then the rate of interest is also halved (if the rate is given in per annum).
Now, in the question, the given principal amount is $P=Rs.80000$, Rate of interest is $r=10%$ per annum and time is $T=1\dfrac{1}{2}=\dfrac{3}{2}$ years.
First, let’s consider the case when the interest is compounded annually.
Here, time is $1\dfrac{1}{2}$ years. So, for the first year, the interest will be compounded annually. But, for the remaining $6$ months, it would be compounded half-yearly.
So, for the first year, $A=80000{{\left( 1+\dfrac{10}{100} \right)}^{1}}$
$=80000\left( 1.1 \right)$ $=88000$
Now, this amount will be the principal for the next $6$ months. So, $n=2\times \dfrac{1}{2}=1$ , and $r=\dfrac{10}{2}=5%$
So, amount after $1\dfrac{1}{2}$ years is given as $A=88000{{\left( 1+\dfrac{5}{100} \right)}^{1}}$
$\Rightarrow A=88000\times 1.05=Rs.92400$
Hence, the amount to be paid after $1\dfrac{1}{2}$ years, when the interest is compounded annually, is $Rs.92400$ .
Now, when the interest is compounded half yearly, $n=\dfrac{3}{2}\times 2=3$, and the rate of interest $r=\dfrac{10}{2}=5%$ .
So, amount after $1\dfrac{1}{2}$ years is given as $A=80000{{\left( 1+\dfrac{5}{100} \right)}^{3}}$
$=80000{{\left( 1.05 \right)}^{3}}$
$=80000\times 1.157625$
$=92610$
Hence, the amount to be paid after $1\dfrac{1}{2}$ years , when the interest is compounded half yearly, is $Rs.92610$ .
So, the difference between the amounts is given as $Rs.\left( 92610-92400 \right)$
$=Rs.210$
Therefore, the difference between the amount to be paid after $1\dfrac{1}{2}$ years, when the interest is compounded half yearly and annually, is $Rs.210$.

Note: When the interest is compounded annually, students generally make a mistake of taking $n$ as $\dfrac{3}{2}$, which is wrong.