Interest - Quant/Math - CAT 2009

Question 4 the day: August 22, 2002
The question for the day is from the topic of compound interest.

A man invests Rs.5000 for 3 years at 5% p.a. compound interest reckoned yearly. Income tax at the rate of 20% on the interest earned is deducted at the end of each year. Find the amount at the end of the third year.

(1)

5624.32

(2)

5630.50

(3)

5788.125

(4)

5627.20

Solution:

5% is the rate of interest. 20% of the interest amount is paid as tax. That is 80% of the interest amount stays back. Therefore, if we compute the rate of interest as 80% of 5% = 4% p.a., we will get the same value.

The interest accrued for 3 years in compound interest = 3*simple interest on principal + 3*interest on simple interest + 1*interest on interest on interest. = 3*(200) + 3*(8) + 1*0.32 = 600 + 24 + 0.32 = 624.32

The amount at the end of 3 years = 5000 + 624.32 = 5624.32