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 :_________?
Correct answer: B. 10.25%
- A. 10%
- B. 10.25%
- C. 10.50%
- D. None of these
Explanation
Charging 10% per annum every 6 months means each half-year period uses a 5% rate. The effective annual rate is (1.05 x 1.05 - 1) x 100% = 10.25%. Option a, 10%, is only the nominal rate and ignores the interest added after the first 6 months.
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About Percentages
Percentages express a quantity as parts per hundred and support calculations involving increases, decreases, discounts, commissions, taxes, and successive changes. Questions require distinguishing percentage change from percentage points and identifying the original value when a final value and its percentage change are given.
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