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Simple and Compound Interest

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Simple and Compound Interest

by tanyasethi » Fri Jul 15, 2011 2:38 am
$1200 is invested at a given interest rate for two years. The difference between the simple 2-year non-compounded return at the end of the two years and an annually compounded return is $132. What is the interest rate?
  • A. 10%
  • B. 11%
  • C. 12%
  • D. 13%
  • E. 14%
The correct answer is A
Please explain how we can get to the answer.
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by pemdas » Fri Jul 15, 2011 2:55 am
R is interest rate
simple 2-year non-compunded return 1,200*R*2
compounded rate, 2 years (1,200+1,200*R)*R

difference ==> (1,200*R + 1,200*R^2) - 2,400*R=132

1,200R^2-1,200*R-132=0
R=(1,200-root{Discriminant} )/2,400
Discriminant D=1,200^2 -4*1,200*(-132)=1,440^2

(1,200-1,440)/2,400=-0.1 and R=|-0.1| or 0.1=10%
tanyasethi wrote:$1200 is invested at a given interest rate for two years. The difference between the simple 2-year non-compounded return at the end of the two years and an annually compounded return is $132. What is the interest rate?
  • A. 10%
  • B. 11%
  • C. 12%
  • D. 13%
  • E. 14%
The correct answer is A
Please explain how we can get to the answer.
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