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. None of these

View Answer

Correct Answer :
10.25%

Explanation :

Let the sum be Rs. 100. Then,

S.I. for first 6 months = Rs.		100 x 10 x 1		= Rs. 5
		100 x 2

S.I. for last 6 months = Rs.		105 x 10 x 1		= Rs. 5.25
		100 x 2

So, amount at the end of 1 year = Rs. (100 + 5 + 5.25) = Rs. 110.25

i.e Effective rate = (110.25 - 100) = 10.25%

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