An automobile financier claims to be lending money at simple interest , but he…
2024
An automobile financier claims to be lending money at simple interest , but he includes the interest every six months for calculating the principal . If he is charging an interest of 10% , the effective rate of interest becomes .
- A.
10%
- B.
10.25%
- C.
10.5%
- D.
10.4%
Attempted by 6 students.
Show answer & explanation
Correct answer: B
Answer: 10.25%
Explanation (take principal = Rs.100):
First 6 months interest = 100 × 10% × 1/2 = 5
New principal after 6 months = 100 + 5 = 105
Second 6 months interest = 105 × 10% × 1/2 = 5.25
Total interest for the year = 5 + 5.25 = 10.25 → effective annual rate = 10.25%
Note: The effective rate is slightly higher than the nominal 10% because interest is added to the principal mid-year and the second half-year interest is charged on the larger amount.