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A bank offers an interest of 5% per annum compounded annua

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A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 100^4:105^4
E. 725:3225
[Reveal] Spoiler: OA

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Last edited by Bunuel on 28 Jan 2015, 07:43, edited 2 times in total.
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


The interest earned in the 1st year = $500
The interest earned in the 2nd year = $500*1.05
The interest earned in the 3rd year = $500*1.05^2
The interest earned in the 4th year = $500*1.05^3
The interest earned in the 5th year = $500*1.05^4

(500*1.05^3)/(500*1.05^4) = 1/1.05=100/105.

Answer: C.
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 14 Jun 2013, 03:22
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


Hi Bunuel,
Here is my approach: is this correct?

Interest earned in 4 year= 10000(1+0.05)^4

Interest earned in 5 year= 10000(1+0.05)^5

Ratio= {10000(1.05)^4}/{10000(1.05^5)} =>1.05^4/1.05^5 =>1/1.05 Multiplied by 100 in both numerator and denominator gives 100:105

Hence Ans:C
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 14 Jun 2013, 03:28
atalpanditgmat wrote:
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


Hi Bunuel,
Here is my approach: is this correct?

Interest earned in 4 year= 10000(1+0.05)^4

Interest earned in 5 year= 10000(1+0.05)^5

Ratio= {10000(1.05)^4}/{10000(1.05^5)} =>1.05^4/1.05^5 =>1/1.05 Multiplied by 100 in both numerator and denominator gives 100:105

Hence Ans:C


Check here: a-bank-offers-an-interest-of-5-per-annum-compounded-annua-154203.html#p1234708
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emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


Thirty seconds approach, regardless of what the figure is at the 4th year it will at act as a base figure (100) for the next years 5% increase (to 105). So the ratio is 100:105 or option C

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 15 Apr 2014, 20:39
Buneul,

I have a doubt.

Quote:
The interest earned in the 1st year = $50
The interest earned in the 2nd year = $50*1.05
The interest earned in the 3rd year = $50*1.05^2
The interest earned in the 4th year = $50*1.05^3
The interest earned in the 5th year = $50*1.05^4


So we are just calculating the interest from interest.Are we not supposed to calculate the interest from the principle amount every year?

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 15 Apr 2014, 22:00
atalpanditgmat wrote:
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


Hi Bunuel,
Here is my approach: is this correct?

Interest earned in 4 year= 10000(1+0.05)^4

Interest earned in 5 year= 10000(1+0.05)^5


Ratio= {10000(1.05)^4}/{10000(1.05^5)} =>1.05^4/1.05^5 =>1/1.05 Multiplied by 100 in both numerator and denominator gives 100:105

Hence Ans:C



This formula is to calculate the total amount, not the compound interest

You require to subtract the Principal to get the resultant compound interest

We require to calculate ratio of interest earned in 4th & 5th year

This method you're using is calculating ratio of 4 yr deposit to 5 yr deposit
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 15 Apr 2014, 22:06
Bunuel wrote:
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


The interest earned in the 1st year = $50
The interest earned in the 2nd year = $50*1.05
The interest earned in the 3rd year = $50*1.05^2
The interest earned in the 4th year = $50*1.05^3
The interest earned in the 5th year = $50*1.05^4

(50*1.05^3)/(50*1.05^4) = 1/1.05=100/105.

Answer: C.



Bunuel, can you please correct this?

It should be 500

\(\frac{10000 * 5 * 1}{100} = 500\)
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 03 Sep 2014, 21:59
question ask what is:

10000*1.05^4/10000*1.05^5

we get 10000/10000*1.05=10000/10500=100/105

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 03 Sep 2014, 23:12
Temurkhon wrote:
question ask what is:

10000*1.05^4/10000*1.05^5

we get 10000/10000*1.05=10000/10500=100/105


Hello.

You're correct for choosing C but wrong for interest formula buddy.

The question asks you to calculate ration of the interest earned in 4th year to the interest earned in 5th year. Your formula is to calculate Total value in 4th year and 5th year NOT interests.

In order to calculate INTEREST in 4th and 5th year, you have to calculate INTEREST in 1st year.

interest in 1st year = 10,000*0.05 = 500
interest in 2nd year = 500*1.05
interest in 3rd year = 500*1.05^2
interest in 4th year = 500*1.05^3
interest in 5th year = 500*1.05^4

Ratio = 1/1.05 = 100/105

Hope it helps.
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 07 Jul 2015, 11:40
Could somebody please explain, how interest could be calculated this way -

The interest earned in the 1st year = $500
The interest earned in the 2nd year = $500*1.05
The interest earned in the 3rd year = $500*1.05^2
The interest earned in the 4th year = $500*1.05^3
The interest earned in the 5th year = $500*1.05^4

Since we are compounding, the interest for the second year should be 500 + 500*1.05

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 07 Jul 2015, 14:20
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 100^4:105^4
E. 725:3225


Interest earned in the first year = $10,000 *(5/100) = $500
i.e. The interest earned in the 1st year = $500

The interest earned in the Second year = $10,000 *(5/100) + $500 *(5/100) = $500 + (5/100)*$500 = $500*1.05
i.e. The interest earned in the 2nd year = $500*1.05
Similarly,
The interest earned in the 3rd year = $500*1.05^2
The interest earned in the 4th year = $500*1.05^3
The interest earned in the 5th year = $500*1.05^4

(500*1.05^3)/(500*1.05^4) = 1/1.05=100/105.

NOTE: Writing every step here is not a great idea as we must understand that Coumpound interest is a form of Geometric Progression in which the ratio of two consecutive terms remain constant hence

1st year interest / 2nd year interest = 2nd year interest / 3rd year interest = 3rd year interest / 4th year interest = 4th year interest / 5th year interest = 1/1.05


Answer: C.
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 17 Sep 2015, 21:26
shankar245 wrote:
Buneul,

I have a doubt.

Quote:
The interest earned in the 1st year = $50
The interest earned in the 2nd year = $50*1.05
The interest earned in the 3rd year = $50*1.05^2
The interest earned in the 4th year = $50*1.05^3
The interest earned in the 5th year = $50*1.05^4


So we are just calculating the interest from interest.Are we not supposed to calculate the interest from the principle amount every year?


Hi Bunuel
I'm agree with shankar245
the interest earned in the 4th years is= 10000(1+0.05)^4-10000=10000((1+0.05)^4-1)
the interest earned in the 5th years is= 10000(1+0.05)^5-10000=10000((1+0.05)^5-1)
the ratio is ((1+0.05)^4-1)/((1+0.05)^5-1)=0.78
can you please clarify?

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A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 17 Sep 2015, 23:47
amirzohrevand wrote:
shankar245 wrote:
Buneul,

I have a doubt.

Quote:
The interest earned in the 1st year = $50
The interest earned in the 2nd year = $50*1.05
The interest earned in the 3rd year = $50*1.05^2
The interest earned in the 4th year = $50*1.05^3
The interest earned in the 5th year = $50*1.05^4


So we are just calculating the interest from interest.Are we not supposed to calculate the interest from the principle amount every year?


Hi Bunuel
I'm agree with shankar245
the interest earned in the 4th years is= 10000(1+0.05)^4-10000=10000((1+0.05)^4-1)
the interest earned in the 5th years is= 10000(1+0.05)^5-10000=10000((1+0.05)^5-1)
the ratio is ((1+0.05)^4-1)/((1+0.05)^5-1)=0.78
can you please clarify?


$500*1.05 = 500 + (5/100)*500

Where 500 is interest earned on principle
And

(5/100)*500 is interest earned on previous interest.

So the expressions include both.

I hope this helps!
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Last edited by GMATinsight on 18 Sep 2015, 04:06, edited 1 time in total.

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A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 18 Sep 2015, 01:06
Hi Bunuel
I'm agree with shankar245
the interest earned in the 4th years is= 10000(1+0.05)^4-10000=10000((1+0.05)^4-1)
the interest earned in the 5th years is= 10000(1+0.05)^5-10000=10000((1+0.05)^5-1)
the ratio is ((1+0.05)^4-1)/((1+0.05)^5-1)=0.78
can you please clarify?[/quote]

$50*1.05 = 50 + (5/100)*50

Where 50 is interest earned on principle
And

(5/100)*50 is interest earned on previous interest.

So the expressions include both.

I hope this helps![/quote]

Hi
Dear GMATinsight
I'm not agree with your approach cuz you dismissed the principle , however the principle must be seen.
your approach yields 0.92 but my approach yields 0.78
I'm still confused
could you elaborate more? plz
can you please let me know what is wrong with my approach?
tnx

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 18 Sep 2015, 04:04
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amirzohrevand wrote:

Hi
Dear GMATinsight
I'm not agree with your approach cuz you dismissed the principle , however the principle must be seen.
your approach yields 0.92 but my approach yields 0.78
I'm still confused
could you elaborate more? plz
can you please let me know what is wrong with my approach?
tnx


Principle = $10,000
Rate of Interest = 5%

Interest earned in the first year = $10,000 *(5/100) = $500
i.e. The interest earned in the 1st year = $500

The interest earned in the Second year = $10,000 *(5/100) + $500 *(5/100) = $500 + (5/100)*$500 = $500*1.05
i.e. The interest earned in the 2nd year = $500*1.05
Similarly,
The interest earned in the 3rd year = $500*1.05^2
The interest earned in the 4th year = $500*1.05^3
The interest earned in the 5th year = $500*1.05^4

(500*1.05^3)/(500*1.05^4) = 1/1.05=100/105.
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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 28 Sep 2015, 08:42
suk1234 wrote:
emmak wrote:
A bank offers an interest of 5% per annum compounded annually on all its deposits. If $10,000 is deposited, what will be the ratio of the interest earned in the 4th year to the interest earned in the 5th year?

A. 1:5
B. 625:3125
C. 100:105
D. 1004:1054
E. 725:3225


Thirty seconds approach, regardless of what the figure is at the 4th year it will at act as a base figure (100) for the next years 5% increase (to 105). So the ratio is 100:105 or option C


I am literally ashamed that I didn't see this :cry:
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New post 25 Apr 2016, 04:45
Quote:
amirzohrevand wrote:
Hi Bunuel
I'm agree with shankar245
the interest earned in the 4th years is= 10000(1+0.05)^4-10000=10000((1+0.05)^4-1)
the interest earned in the 5th years is= 10000(1+0.05)^5-10000=10000((1+0.05)^5-1)
the ratio is ((1+0.05)^4-1)/((1+0.05)^5-1)=0.78
can you please clarify?

$50*1.05 = 50 + (5/100)*50

Where 50 is interest earned on principle
And

(5/100)*50 is interest earned on previous interest.

So the expressions include both.

I hope this helps!


Hi
Dear GMATinsight
I'm not agree with your approach cuz you dismissed the principle , however the principle must be seen.
your approach yields 0.92 but my approach yields 0.78
I'm still confused
could you elaborate more? plz
can you please let me know what is wrong with my approach?
tnx


Hi,

you are calculating total interest earned in 4 years i.e interest of 1year + 2year + 3year + 4year by that formula

Correct way to calculate 4th year interest is-

10,000(1 + .05)^4 - 10,000(1+ .05)^3

hope this helps!

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Re: A bank offers an interest of 5% per annum compounded annua [#permalink]

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New post 10 Jul 2017, 19:18
C.I=P(1+r)^n
Interest earned in 4 th year = P(1+0.05)^3
Interest earned in 5 th year = P(1+0.05)^4
Ratio of Interest earned in 4 th year : Ratio of Interest earned in 5 th year = P(1+0.05)(1+0.05)(1+0.05)/P(1+0.05)(1+0.05)(1+0.05)(1+0.05)
=1/(1+0.05)
=100/105{Multiplied by 100}
Ans C

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A bank offers an interest of 5% per annum compounded annua [#permalink]

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Bunuel or any mods,

Please help understand this.

Compound Interest (CI) for 1st year is \(\frac{5}{100}\)*10000 + 10000 = 10,500


Compound Interest (CI) for 2nd year is \(\frac{5}{100}\)*10500 + 10500 = 11,025


Compound Interest (CI) for 3rd year is \(\frac{5}{100}\)*11,025+ 11,025 ----- And this becomes an ugly math. Why? Where am I going wrong?


Compound Interest (CI) for 4th year is \(\frac{5}{100}\)*? + ? ------ By this point, I was heavily estimating the calculation. And I am still left with calculating for 5th year.


Compound Interest (CI) for 5th year is \(\frac{5}{100}\)*?+ ?

I somehow arrived at the correct answer but I see that there is inherently some mistake in my approach. Could someone help? TIA.

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