Question : If the rate of interest is 4% for the first year, 5% for the second year and 6% for the third year, then find the compound interest on Rs. 10,000 for 3 years, if interest is compounded annually.
Option 1: Rs. 1,580.25
Option 2: Rs. 1,575.20
Option 3: Rs. 1,500.00
Option 4: Rs. 1,570.50
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Correct Answer: Rs. 1,575.20
Solution : The formula for compound interest (CI) when the rate of interest is different for different years is, CI = P × (1 + R 1 ) × (1 + R 2 ) × (1 + R 3 ) – P where P is the principal amount, R 1 is the rate of interest for the first year, R 2 is the rate of interest for the second year and R 3 is the rate of interest for the third year. So, the compound interest is: CI = 10000 × (1 + 0.04) × (1 + 0.05) × (1 + 0.06) – 10000 = 10000 × (1.04) × (1.05) × (1.06) – 10000 = 11575.20 – 10000 = Rs. 1575.20 Hence, the correct answer is Rs. 1575.20.
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