Simple Interest Practice Test 4

Question : 21 of 26

Marks: +1, -0

A financer claims to be lending money at simple interest, but he includes the interest every six months for calculating the principal. If he charging an interest of 10%, the effective rate of interest becomes:

11%
10.5%
10.25%
10%

Validate

Solution:

Let principal = Rs. 100; then
Interest for 6 months =

{100 ×10 ×1}/{100 ×2}

= Rs. 5
Now, amount = 100 + 5 = Rs. 105
Again, interest for another 6 months =

{105 ×10 ×1}/{100 ×2}

= Rs. 5.25
Hence, amount after 1 year = 105 + 5.25 = Rs. 110.25
Since, effective rate of interest = 110.25 – 100 = 10.25% p.a

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