A money-lender claims he lends money at a simple rate of interest of 8% per annum. But he cleverly includes the interest amount in the principal when he calculates it every six months. The effective rate of interest becomes:
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. 8.16%.
Semi annual rate (R) = 8/2 = 4%
Compounding time (n) = 2
Effective rate = [(1 + R/100)n - 1] × 100
= [(1 + 4/100)2 - 1] × 100
= [(1 + 1/25)2 - 1] × 100
= [(26/25)2 - 1] × 100
= [676/625 - 1] × 100
= (51/625) × 100
= 8.16%
Hence, the effective rate is 8.16%.