Question

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. None of these

Answer 1

Answer: (B)

10.25%

Answer 2

Let the principle amount be $100$

Simple interest for first 6 months $=\frac{100×1×10}{100×2}=5$

Simple interest for next 6 months Total principle amount after 1 year $=\frac{105×1×10}{100×2}=5.25$

Total principle amount after 1 year = 100 + 5 + 5.25 = 110.25

Effective rate of interest = 10.25$\%$

Hence, option B is the correct answer.The correct option is (B): 10.25%