Hi All,
Interest rate questions are a relatively rare category on Test Day - you'll likely see just one question on the subject and it will involve one or both of the following formulas:
Simple Interest = Principal x (1 + RT)
Compound Interest = Principal x (1 + R)^T
...where R is the yearly interest rate and T is the number of years.
Normally, a question gives you the relevant information to work with, then asks you to perform the calculation. Sometimes there are "twists" though (eg. you're given the end result and have to "work backwards" to find the interest rate or principal) and in rare cases, you'll be asked to deal with a situation in which interest is compounded MORE than once per year.
The 'rule' for handling the Compound Interest Formula in this situation is pretty simple though:
For the number of times that you compound per year:
1) MULTIPLY T by that number
2) DIVIDE R by that number
For example, in this question we have $10,000 at 8% interest compounded SEMI-ANNUALLY (meaning twice per year) for 1 year.
IF...we were just calculating ONCE per year, we'd have......$10,000 x (1 + .08)^1
For TWICE per year (which is what we have here)...............$10,000 x (1 + .04)^2
For FOUR times per year....................................................$10,000 x (1 + .02)^4
For EIGHT times per year...................................................$10,000 x (1 + .01)^8
Etc.
As has been pointed out, the correct answer is
.
It's important to note the specific wording and numbers in these types of questions. It's common for one (or more) of the wrong answers to be the result of a DIFFERENT/INCORRECT calculation, so if you make a silly mistake, then you won't know that you are wrong.
GMAT assassins aren't born, they're made,
Rich