Simple Interest & compound interest 3

lav wrote:a sum of money is borrowed and paid back in two equal annual installments of 882 allowing 5% compound interest. the sum borrowed was
a) 1640 b) 1680 c) 1620 d) 1700


my ans was 1603 which is not an option
OA after some discussion

Same problem here again. 5% interested compounded what? annually? Semiannually? quarterly? monthly? daily?

Different answers under different compounding.

I go with annual compounding.

After the first year the future value of the borrowed sum P is:

P(1+r). Out of this sum you pay 882 and are left with

P(1+r)-882. This is the money left in the pot and interest will be compounded annually on it again.

(P(1+.05)-882)(1+.r). Using 5% for interest rate after the second year we are told this future value is 882 So

(P(1.05)-882)(1.05)=882

1.05^2 P- 926.1=882

1.1025P=1808.1

P= 1640

Choose A