4: In a particular loan the interest rate per month is 1%
then, the effective rate of interest will be:
2573562887
12%
12.36%
12.84%
12.68%
Answers
Given : In a particular loan the interest rate per month is 1%
To Find : the effective rate of interest will be:
Solution:
Let say
Principle = P
rate of interest r = 1 % per month
Time = n = 12 months
A = P(1 + r/100)ⁿ
=> A = P ( 1 + 1/100)¹²
=> A = P (1.1268)
Let say effective rate of interest = R % per annum
P = P
R = ?
n = 1 Year
A = P (1 + R/100)¹ = P ( 1 + R/100)
Equating both
P ( 1 + R/100) =P (1.1268)
=> 1 + R/100 = 1.1268
=> R/100 = 0.1268
=> R = 12.68
the effective rate of interest will be: 12.68 %
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The effective rate of interest will be 12.68%.
- The effective interest rate provides a relatively complete picture of the true total value of a borrowing.
- The effective rate of interest is calculated as - Effective rate = ( 1 + Nominal rate /n)`n
- Since the interest rate is 1% per month, thus it is for monthly basis which means 12 months.
- On substituting the values we will get - r = ( 1 + 0.01/12)`12
- Thus, the effective rate of interest for 12 periods is will be 12.68%.