Question 7

Mr. Madhukar worked for 5 years in a multi-commodity trading company after graduating from a
reputed B-School. He then resigned from his job and started an online garment export business. For
his business Madhukar used Rs. 8,00,000/- of his own savings and borrowed Rs. 12,00,000/- from a
private sector bank in April, the beginning month of the financial year. Mean while, RBI eased repo
rate in May and banks passed on the benefits to the borrowers. As a result, Madhukar borrowed an
additional Rs. 9,00,000/- after 4 months at an interest rate which is 10% lower than the interest rate of
his earlier borrowing. If the total interest paid by Madhukarat the end of that year on both the loans is
Rs. 1,39,200/-, what is the interest rate per annum on first borrowing ?

Solution

Let the rate of interest of first borrowing be R% p.a.
The principal of first borrowing is kept for an entire 12 month span.
Hence, simple interest payable on it at end of financial year = (12,00,000*1*R)/100 = 12,000*R rupees

Now, rate of second borrowing = 0.9R % p.a.
The principal of second borrowing is kept for 8 months total till financial year end.
Hence, simple interest payable on it at end of financial year = (9,00,000*R*8)/(12*100) = 5400R rupees

Now, 12000R + 5400R = 1,39,200
Hence, R = 8% p.a.

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