Question 54

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

Solution

Let the principle amount be 100

Simple interest for first 6 months = $$\frac{100 \times 1 \times 10}{100 \times 2}$$ = 5

Simple interest for next 6 months = $$\frac{105 \times 1 \times 10}{100 \times 2}$$ = 5.25

Total principle amount after 1 year = 100 + 5 + 5.25 = 110.25

Effective rate of interest = 10.25%

Hence, option B is the correct answer.

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