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. 10.75%

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) / (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%

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