Multiple choice

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

  1. 10%

  2. 10.25%

  3. 10.5%

  4. 12%

  5. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

With interest calculated every six months at 10% per annum, the rate for each half-year is 5%. The effective annual rate is calculated as (1 + 0.05)^2 - 1 = 1.1025 - 1 = 0.1025, or 10.25%.

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