Interests L1

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

  1. 11%
  2. 10.75%
  3. 10.5%
  4. 10.25%

Answer

Let the initial amount be ₹ P. Then, amount at the end of an year at rate of interest 10% charged every 6 months is 

= P × (1 + 0.1) × (1 + 0.1)

= 1.21 × P

So, rate of interest per annum = 21%.

Therefore, the effective rate of interest payable every six months

= (21 ÷ 2) % = 10.5%

The correct option is C.