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 :_________?
- 10%
- 10.40%
- 10.25%
- 10.50%
- 10.80%
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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