compound interes

by **lauren** Wed Jul 30, 2008 11:54 am

in this problem, i made the mistake of compounding interest at 10% each semester instead of 5% each semester (given the case of interest compounded semi-anually). is the rule always to divide the interest rate by half and compound, or would there be a case where i would take 10% of the original value (in this case 1000) after a semester?

Ricardo deposits $1,000 in a bank account that pays 10% interest, compounded semiannually. Poonam deposits $1,000 in a bank account that pays 10% interest, compounded annually. If no more deposits are made, what is the difference between the two account balances after 1 year?

by RA Sat Aug 09, 2008 9:03 am

Unless explicitly specified interest rate should be assumed to be an annual percentage. The annual percentage should be divided by the number of compounding periods in a year to arrive at a interest rate for the compounding period.

by **RonPurewal** Wed Sep 17, 2008 4:46 am

if this problem statement is taken verbatim from the source, then it's problematic: it doesn't specify the period of the interest. if a bank quotes you an interest rate, then it's safe to assume that it's annual interest by default, but real gmat problems are always INCREDIBLY detailed and specific about these types of things.

the problem statement should say "10% annual interest, compounded semiannually". if it only says "10% interest", as quoted in the original post, then it's ambiguous, and lauren's interpretation is actually just as valid as the "correct" interpretation.

lauren?
what's the source, and did the source actually say "10% annual interest compounded semiannually"?