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# An investor opened a money market account with a single deposit of $60 SORT BY: Tags: Show Tags Hide Tags Intern Joined: 07 Dec 2009 Posts: 11 Own Kudos [?]: 209 [160] Given Kudos: 4 Most Helpful Reply Manhattan Prep Instructor Joined: 28 Aug 2009 Posts: 144 Own Kudos [?]: 1490 [69] Given Kudos: 6 Location: St. Louis, MO Schools:Cornell (Bach. of Sci.), UCLA Anderson (MBA) Manager Joined: 18 Feb 2010 Posts: 102 Own Kudos [?]: 644 [30] Given Kudos: 0 Concentration: Finance Schools:ISB Q44 V28 GMAT 2: 620 Q51 V23 General Discussion Intern Joined: 07 Dec 2009 Posts: 11 Own Kudos [?]: 209 [0] Given Kudos: 4 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
Esledge,

I gave you kudos! This is exactly what I was looking for! Thanks for the shortcuts and tips! You rock! Congrats also on your 790 score!
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] 1 Kudos esledge wrote: I'm not sure this method dodges formulas as much as you want, but here goes: 10% of the initial deposit is$600, and the account has already earned $125+$130+$145 =$400. Must make $200 in the last quarter, and the balance at that point is$6000+$400 =$6400.

This method is called Benchmarking:
If 1% (annual rate) were earned on $6400, that would be$64 a year or $64/4 =$16 per quarter.

How many $16 payments (i.e. 1 percent payments) must this account earn to collect$200? $200/$16 = 12.5 of the 1% payments, or 12.5%.

Alternatively, you could benchmark using 10% (annual rate). That would give us $640 a year or$160 per quarter (not enough, but A,B, and C are wrong for sure). $160 plus$40 (or 1/4 of $160) is what we need. Thus, 10% + (1/4)(10%) = 12.5% Nice one mate! Cheers! JT Manager Joined: 22 Aug 2014 Posts: 98 Own Kudos [?]: 36 [0] Given Kudos: 49 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
mustdoit wrote:
cccmom wrote:
I sure would appreciate some help on this one. If I don't know the formula, how can I solve conceptually?

An investor opened a money market account with a single deposit of $6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was$125, $130, and$145, respectively. If the investor made no deposits or withdrawals during the year, approximately what annual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit?

A - 3.1%
B - 9.3%
C - 10.0%
D - 10.5%
E - 12.5%

We know 10% of 6000 is 600
already earned is Rs. 400 in 3 quarters
balance to be earned is 200 on amount of 6400 (6000+400 intt)

we get quarterly Rate of Interest as 3.125% (200/6400).

anually it would be 3.125*4 = 12.5%

hope that works out for you.

Award KUDOS if you appreciate !!!

I am not able to get the last line.why we are multiplying 3.125*4?
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] ssriva2 wrote: mustdoit wrote: cccmom wrote: I sure would appreciate some help on this one. If I don't know the formula, how can I solve conceptually? An investor opened a money market account with a single deposit of$6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was $125,$130, and $145, respectively. If the investor made no deposits or withdrawals during the year, approximately what annual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit? A - 3.1% B - 9.3% C - 10.0% D - 10.5% E - 12.5% Because of the highlighted line shown below: An investor opened a money market account with a single deposit of$6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was $125,$130, and $145, respectively. If the investor made no deposits or withdrawals during the year, approximately whatannual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit? Intern Joined: 24 Oct 2014 Posts: 37 Own Kudos [?]: 24 [0] Given Kudos: 17 Location: United States GMAT 1: 710 Q49 V38 GMAT 2: 760 Q48 V47 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
You need to earn $200 in the last Q to earn 10% for the year. the total money at the end of Q3 is 6400. $$\frac{200}{6400}$$is approximately 3.xx% for the Q, multiply that by 4, you will see the answer is 12.xxx. Only one choice. Senior Manager Joined: 28 Feb 2014 Posts: 269 Own Kudos [?]: 325 [0] Given Kudos: 132 Location: United States Concentration: Strategy, General Management Re: An investor opened a money market account with a single deposit of$60 [#permalink]
ssriva2 wrote:
mustdoit wrote:
cccmom wrote:
I sure would appreciate some help on this one. If I don't know the formula, how can I solve conceptually?

An investor opened a money market account with a single deposit of $6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was$125, $130, and$145, respectively. If the investor made no deposits or withdrawals during the year, approximately what annual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit?

A - 3.1%
B - 9.3%
C - 10.0%
D - 10.5%
E - 12.5%

We know 10% of 6000 is 600
already earned is Rs. 400 in 3 quarters
balance to be earned is 200 on amount of 6400 (6000+400 intt)

we get quarterly Rate of Interest as 3.125% (200/6400).

anually it would be 3.125*4 = 12.5%

hope that works out for you.

Award KUDOS if you appreciate !!!

I am not able to get the last line.why we are multiplying 3.125*4?

I believe it is because the question asks for the "annual rate" of interest.

Hence we have to do a conversion from quarterly to annual.
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] esledge wrote: I'm not sure this method dodges formulas as much as you want, but here goes: 10% of the initial deposit is$600, and the account has already earned $125+$130+$145 =$400. Must make $200 in the last quarter, and the balance at that point is$6000+$400 =$6400.

This method is called Benchmarking:
If 1% (annual rate) were earned on $6400, that would be$64 a year or $64/4 =$16 per quarter.

How many $16 payments (i.e. 1 percent payments) must this account earn to collect$200? $200/$16 = 12.5 of the 1% payments, or 12.5%.

Alternatively, you could benchmark using 10% (annual rate). That would give us $640 a year or$160 per quarter (not enough, but A,B, and C are wrong for sure). $160 plus$40 (or 1/4 of $160) is what we need. Thus, 10% + (1/4)(10%) = 12.5% '' Hi Esledge Thanks for wonderful explanation,but i have a confusion here. If we use the normal interest computation formula Interest=( Amount *Rate of Interest *Duration)/100 We get( 6000*R*0.25)/100=125 R=8.3 Can you through some light why this technique is not applicable here? e-GMAT Representative Joined: 04 Jan 2015 Posts: 3712 Own Kudos [?]: 17313 [10] Given Kudos: 165 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
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kanigmat011 wrote:
esledge wrote:
I'm not sure this method dodges formulas as much as you want, but here goes:

10% of the initial deposit is $600, and the account has already earned$125+$130+$145 = $400. Must make$200 in the last quarter, and the balance at that point is $6000+$400 = $6400. This method is called Benchmarking: If 1% (annual rate) were earned on$6400, that would be $64 a year or$64/4 = $16 per quarter. How many$16 payments (i.e. 1 percent payments) must this account earn to collect $200?$200/$16 = 12.5 of the 1% payments, or 12.5%. Alternatively, you could benchmark using 10% (annual rate). That would give us$640 a year or $160 per quarter (not enough, but A,B, and C are wrong for sure).$160 plus $40 (or 1/4 of$160) is what we need. Thus, 10% + (1/4)(10%) = 12.5%

''

Hi Esledge

Thanks for wonderful explanation,but i have a confusion here.
If we use the normal interest computation formula Interest=( Amount *Rate of Interest *Duration)/100
We get( 6000*R*0.25)/100=125
R=8.3
Can you through some light why this technique is not applicable here?

Hi kanigmat011 that will not applicable because you are using the formula for Simple Interest calculation where as the question asks for Compound Interest working. Now, how do we know that the question deals with CI? Because the interest earned on the account was reinvested quarterly; thus the interest earned during the previous quarters will also further earn interest on them.

In case of Simple Interest, the interest earned during the previous quarters do not earn interest on them, only the principal does. Hence, the technique you are using would not apply here.

The other way to solve this problem would be:

Amount of interest to be earned in the last quarter= 6000* 0.10 - (125+130+145) = 200
Principal balance in the account = 6000 + 400 = 6400

Hence, quarterly interest rate = $$\frac{200}{6400}$$ * 100 = 3.125%

So, the annual interest rate = 3.125% * 4 = 12.5%

Hope it helps!

Regards
Harsh
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] EgmatQuantExpert wrote: kanigmat011 wrote: esledge wrote: I'm not sure this method dodges formulas as much as you want, but here goes: 10% of the initial deposit is$600, and the account has already earned $125+$130+$145 =$400. Must make $200 in the last quarter, and the balance at that point is$6000+$400 =$6400.

This method is called Benchmarking:
If 1% (annual rate) were earned on $6400, that would be$64 a year or $64/4 =$16 per quarter.

How many $16 payments (i.e. 1 percent payments) must this account earn to collect$200? $200/$16 = 12.5 of the 1% payments, or 12.5%.

Alternatively, you could benchmark using 10% (annual rate). That would give us $640 a year or$160 per quarter (not enough, but A,B, and C are wrong for sure). $160 plus$40 (or 1/4 of $160) is what we need. Thus, 10% + (1/4)(10%) = 12.5% '' Hi Esledge Thanks for wonderful explanation,but i have a confusion here. If we use the normal interest computation formula Interest=( Amount *Rate of Interest *Duration)/100 We get( 6000*R*0.25)/100=125 R=8.3 Can you through some light why this technique is not applicable here? Hi kanigmat011 that will not applicable because you are using the formula for Simple Interest calculation where as the question asks for Compound Interest working. Now, how do we know that the question deals with CI? Because the interest earned on the account was reinvested quarterly; thus the interest earned during the previous quarters will also further earn interest on them. In case of Simple Interest, the interest earned during the previous quarters do not earn interest on them, only the principal does. Hence, the technique you are using would not apply here. The other way to solve this problem would be: Amount of interest to be earned in the last quarter= 6000* 0.10 - (125+130+145) = 200 Principal balance in the account = 6000 + 400 = 6400 Hence, quarterly interest rate = $$\frac{200}{6400}$$ * 100 = 3.125% So, the annual interest rate = 3.125% * 4 = 12.5% Hope it helps! Regards Harsh Thanks Harsh But as per my understanding SI or CI for first initial year is same. for Eg R=10% amount =1000 and amount is invested in SI and CI for next 2 years so for 1st year SI=1000*10*1)/100=100 CI for 1st year= 1000(1+10/100) which gives CI=100 So here in this case 1st quarter CI on amount of 6000 should be same as SI on amount of 6000 . So equating that we get rate of interest as ( 6000*R*0.25)/100=125 R= 8.33%. e-GMAT Representative Joined: 04 Jan 2015 Posts: 3712 Own Kudos [?]: 17313 [0] Given Kudos: 165 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
kanigmat011 wrote:
EgmatQuantExpert wrote:
kanigmat011 wrote:

''

Hi Esledge

Thanks for wonderful explanation,but i have a confusion here.
If we use the normal interest computation formula Interest=( Amount *Rate of Interest *Duration)/100
We get( 6000*R*0.25)/100=125
R=8.3
Can you through some light why this technique is not applicable here?

Hi kanigmat011 that will not applicable because you are using the formula for Simple Interest calculation where as the question asks for Compound Interest working. Now, how do we know that the question deals with CI? Because the interest earned on the account was reinvested quarterly; thus the interest earned during the previous quarters will also further earn interest on them.

In case of Simple Interest, the interest earned during the previous quarters do not earn interest on them, only the principal does. Hence, the technique you are using would not apply here.

The other way to solve this problem would be:

Amount of interest to be earned in the last quarter= 6000* 0.10 - (125+130+145) = 200
Principal balance in the account = 6000 + 400 = 6400

Hence, quarterly interest rate = $$\frac{200}{6400}$$ * 100 = 3.125%

So, the annual interest rate = 3.125% * 4 = 12.5%

Hope it helps!

Regards
Harsh

Quote:
Thanks Harsh
But as per my understanding SI or CI for first initial year is same.
for Eg R=10% amount =1000 and amount is invested in SI and CI for next 2 years
so for 1st year SI=1000*10*1)/100=100
CI for 1st year= 1000(1+10/100) which gives CI=100

So here in this case 1st quarter CI on amount of 6000 should be same as SI on amount of 6000 . So equating that we get rate of interest as
( 6000*R*0.25)/100=125
R= 8.33%.

Hi kanigmat011 - the CI and SI are same till the first compounding (and not the first year), which in this case is 1st quarter. But the question asks for the rate of interest for the 4th quarter. Note that till the 4th quarter the principal for CI and SI would change. While the principal for SI would remain at 6000 the principal for CI would increase to 6400.

For the example which you took, if the CI is compounded semi-annually instead of annually, the interest for the first year for CI would be greater than that of SI. CI and SI would be equal for the first 6 months only i.e. till the first compounding.

Hope its clear. Let me know if you are having trouble at any point.

Regards
Harsh
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] Can anyone tell me whether my approach is correct? 6000(1+r/4)=125 6000(1+r/4)^2=130 [We take the previous value and multiply by (1+r/4) to express the reinvestment of the interest] 6000(1+r/4)^3=145 6000(1+r/4)^3(1+x/4)=600 145(1+x/4)=600 x approx = 12.55 E Intern Joined: 15 Feb 2015 Posts: 3 Own Kudos [?]: 7 [4] Given Kudos: 10 An investor opened a money market account with a single deposit of$60 [#permalink]
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This can be simply done with a clear understanding of compound interest.In compound interest too, you reinvest the interest earned.
Basically, CI1+CI2+CI3 = 125 +130 +145 = 400
So by the end of 3 quarters, total amount would be 6400$i.e, 6000(1+r/100)^3 = 6400 ----(1) By the end of 4th quarters, the interest should be 10% of the amount initially invested, which is 10% of 6000 = 600 i.e, 6000(1+r/100)^4 =6600 ----(2) Divide eqn (1) and (2), you will get quarterly r of 3.125% => Annual rate would be 3.125 * 4 = 12.5% Manager Joined: 10 Jun 2015 Posts: 88 Own Kudos [?]: 72 [2] Given Kudos: 0 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
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cccmom wrote:
An investor opened a money market account with a single deposit of $6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was$125, $130, and$145, respectively. If the investor made no deposits or withdrawals during the year, approximately what annual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit?

A. 3.1%
B. 9.3%
C. 10.0%
D. 10.5%
E. 12.5%

Total interest earned for the first three quarters is 400
therefore, he has to earn 200 in the fourth quarter in order to make up 10% on 6000
Since it is compounded, P=6400, t=1/4, r=?, interest =200
Apply simple interest formula
r=12.5%
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] TooLong150 wrote: Can anyone tell me whether my approach is correct? 6000(1+r/4)=125 6000(1+r/4)^2=130 [We take the previous value and multiply by (1+r/4) to express the reinvestment of the interest] 6000(1+r/4)^3=145 6000(1+r/4)^3(1+x/4)=600 145(1+x/4)=600 x approx = 12.55 E First, theory Amount = Principal+Interest CI = PR^n-P Secondly, the quarterly interests are not exact figures. It seems to be rounded off. That could be the reason you did not get the accurate answer. You can look at my solution (matvan) Manager Joined: 23 Sep 2015 Posts: 68 Own Kudos [?]: 50 [0] Given Kudos: 213 Concentration: General Management, Finance GMAT 1: 680 Q46 V38 GMAT 2: 690 Q47 V38 GPA: 3.5 Re: An investor opened a money market account with a single deposit of$60 [#permalink]
If we are pressed for time, this is a way to make an educated guess.

After the 1 minute mark, I simply looked at the answer choices knowing that they may give us a monthly rate to trip us up. 3.1 x 4 ~12.5

So I went with 12.5
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Re: An investor opened a money market account with a single deposit of $60 [#permalink] 1 Kudos mustdoit wrote: cccmom wrote: I sure would appreciate some help on this one. If I don't know the formula, how can I solve conceptually? An investor opened a money market account with a single deposit of$6000 on Dec. 31, 2001. The interest earned on the account was calculated and reinvested quarterly. The compound interest for the first 3 quarters of 2002 was $125,$130, and $145, respectively. If the investor made no deposits or withdrawals during the year, approximately what annual rate of interest must the account earn for the 4th quarter in order for the total interest earned on the account for the year to be 10 percent of the initial deposit? A - 3.1% B - 9.3% C - 10.0% D - 10.5% E - 12.5% We know 10% of 6000 is 600 already earned is Rs. 400 in 3 quarters balance to be earned is 200 on amount of 6400 (6000+400 intt) we get quarterly Rate of Interest as 3.125% (200/6400). anually it would be 3.125*4 = 12.5% hope that works out for you. Award KUDOS if you appreciate !!! most logical answer Manager Joined: 14 Oct 2012 Posts: 116 Own Kudos [?]: 260 [1] Given Kudos: 1023 An investor opened a money market account with a single deposit of$60 [#permalink]
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Hello Friends, i did this and got right answer:

Step1: Simple interest to calculate amount at the end of 1st year:
(P*r*T/100)
6000*10/100*1 = 600
Thus, total amount at the end of 1st year would be 6600.

Step 2: Calculating rate of interest in Q4:
Initially invested: 6000
Quarterly gains Q1:125, Q2:130 & Q3:145
Total gains = 400
Therefore principle at the beginning of 4th quarter: 6400

Time in the year = Q4 = 3 months = t = 3/12 = 1/4
compounded quarterly = n = 4.
Formula: Balance = Principle*(1+r/n)^(t*n)

We need to get 6600 by the end of 4th quarter.
6400*(1+r/100*1/4)^(1/4*4) = 6600
6400*(1+r/100*1/4) = 6600
6400 + 6400*(r/100)*(1/4) = 6600
6400*(r/100)*(1/4) = 200
64*(r/100)*(1/4) = 2
16*(r/100) = 2
r = (2/16)*100 = (1/8)*100 = 12.5%
We need to remember that for the 1st compounding SI = CI and here it would be same for final quarter. (Better explained by Harsh e-gmat).
Please critique my solution and let me know if you see anything wrong.
Thanks

Originally posted by manishtank1988 on 12 Aug 2016, 22:06.
Last edited by manishtank1988 on 22 Apr 2017, 09:40, edited 1 time in total.
An investor opened a money market account with a single deposit of \$60 [#permalink]
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