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 14% the effective rate of interest becomes:
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. 14.49%.
Given:
An automobile financier claims to be lending money at simple interest, but he includes the interest every six months for calculating the principal
He is charging an interest of 14%
Formula used:
Simple interest = PRT/100 where
P = principle, R = rate and T = time
Calculations:
Let the Principle be 100
Using equation (1), we get
⇒ (100 × 14 × 1/2)/100 = 7
Next 6 months, the interest earned = 100 + 7 = 107
Interest earned after 6 months
⇒ (107 × 14 × 1/2)/100 = 7.49
Total interest = 7.49 + 7 = 14.49
Required rate of interest = (14.49/100) × 100 = 14.49%