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An automobile financier claims to be lending money at simple interest, but he includesthe interest every six months for calculating the principal. If he is charging an interest of10%, the effective rate of interest becomes:

10%
10.25%
10.5%
none of these

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.[(102 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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