Question 15 of 50intermediate💡 UnderstandShort Answer2 marks

If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

Correct Answer

When a fixed amount is withdrawn on the first day of every quarter (beginning of each quarter), the interest on the total amount withdrawn is calculated for a period of 7½ months.

The average period is calculated using the formula: Average Period = (Period of first drawing + Period of last drawing) / 2. For withdrawals at the beginning of each quarter, the first withdrawal (April 1) remains withdrawn for 12 months, and the last withdrawal (January 1) remains withdrawn for 3 months. Therefore, Average Period = (12 + 3) / 2 = 7½ months.

Alternatively, it can be calculated as: (12 + 9 + 6 + 3) / 4 = 30/4 = 7½ months.

Exercise: Short Answer Questions | Q: 6 | (Page 36)
For More Understanding

Explanation

The textbook clearly states that when a fixed amount is withdrawn quarterly at the beginning of each quarter, interest is calculated for 7½ months. The formula (12+3)/2 represents the average of the first drawing period (12 months) and last drawing period (3 months). The alternative calculation (12+9+6+3)/4 averages all four quarterly withdrawal periods.

Solution Steps

  1. Step 1: Identify that withdrawal is at the beginning of each quarter (first day)

  2. Step 2: Note the time periods for each withdrawal: April 1 = 12 months, July 1 = 9 months, October 1 = 6 months, January 1 = 3 months

  3. Step 3: Apply average period formula: (12 + 3) / 2 = 7½ months OR (12 + 9 + 6 + 3) / 4 = 7½ months

PreviousNext