CMFAS RES5 Financial Planning & Calculations question: maturity value under annual compounding exceed the value

CMFAS RES5Financial Planning & Calculations

A client places S$25,000 for 2 years at 8% per annum. By how much does the maturity value under annual compounding exceed the value the same sum would reach under simple interest?

A S$0
B S$320
C S$160
D S$4,160

Show the answer and explanation

Answer: C. S$160

Compound: 25,000 × (1.08)² = 25,000 × 1.1664 = S$29,160. Simple: 25,000 × (1 + 0.08×2) = 25,000 × 1.16 = S$29,000. Difference = 29,160 − 29,000 = S$160 — the 'interest on interest' earned by compounding.

Common mistake

S$0 assumes the two methods give the same result; compounding always exceeds simple interest beyond the first period. S$4,160 is the total compound interest, not the excess over simple interest.

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