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. 10.50%
D. None of these

Let the sum be Rs. 100. Then, S.I. for first 6 months = Rs. ( 100 X 10 X 1/100 X 2 ) = Rs. 5. S.I. for last 6 months = Rs. ( 105 X 10 X 1/100 X 2 ) = Rs. 5.25. So, amount at the end of 1 year=Rs.(100 + 5 + 5.25) = Rs. 110.25 Effective rate = (110.25 – 100) = 10.25%.

Correct Answer: 10.25% ✔

Last Updated: February 07, 2020