An automotive financier claims to be lending money at simple interest, but when computing the principal, he includes the interest every six months. If he charges a ten percent interest rate, the effective rate of interest is:
A. 10%
B. 10.25%
C. 10.5%
D. None of these
Answer:B
An automotive financier claims to be lending money at simple interest, but when computing the principal, he includes the interest every six months. If he charges a ten percent interest rate, the effective rate of interest is:
A. 10% B. 10.25% C. 10.5% D. None of these
Explanation: Assume the amount is Rs. 100. S.I. for the first six months = Rs. 100 x 10 x 1/100 x 2 = Rs. 5 S.I. for the remaining six months = Rs. 105 x 10 x 1/100 x 2 = Rs. 5.25.So, at the end of a year, the total amount is Rs. (100 + 5 + 5.25) = Rs. 110.25.(110.25 - 100) = 10.25% effective rate.