Alberta Police Cognitive Ability Test (APCAT) Practice Exam

With annual compound interest at 5%, what is the amount after 2 years on 1000?

1000 1100 1102.50 1200

Correct Answer:

1102.50

Explanation:

Annual compound interest means each year’s interest is earned on the balance at the end of the previous year. Start with 1000. After one year at 5%, you have 1000 × 1.05 = 1050. After the second year, apply 5% to 1050: 1050 × 1.05 = 1102.50. So the amount after two years is 1102.50. This is higher than simple interest (which would yield 1100) because the interest each year is earned on the growing balance, not just the original principal.

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