Bunuel wrote:

How much interest will $2,400 earn at an annual rate of 8% in one year if the interest is compounded every 4 months?

A. $141

B. $150

C. $197

D. $234

E. $312

Even if the options are much closer, we can approximate compound interest by splitting it into interest on principal and interest on interest and get quite an accurate value.

The interest is compounded every 4 months i.e. 3 times a year.

Interest on principal = (8/100) * 2400 = 64 * 3

So in each time interval of 4 months, it earns $64.

In the second interval, it earns a bit on this $64. The rate of interest is 8/3% which is less than 3%. So it earns less than $2 as interest on interest.

In the third interval, it earns a bit on $64 + $64 + $2 = $130. The rate of interest is again 8/3% which is less than 3% so it earns about $3.

All in all, it earns 64*3 + 2 + 3 = $197 as interest.

Answer (C)

_________________

Karishma

Veritas Prep GMAT Instructor

Learn more about how Veritas Prep can help you achieve a great GMAT score by checking out their GMAT Prep Options >

GMAT self-study has never been more personalized or more fun. Try ORION Free!