Mathematics of FinanceMCQPYQ June 19Question 1193 of 512
All Questions

The effective rate of interest does not depend upon

Options

AAmount of Principal
BAmount of Interest
CNumber of Conversion Periods
DNone of these
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Correct Answer

Option aAmount of Principal

All Options:

  • AAmount of Principal
  • BAmount of Interest
  • CNumber of Conversion Periods
  • DNone of these

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Detailed Solution & Explanation

**Conceptual Question on Effective Rate of Interest** The formula for the effective rate of interest (E\displaystyle E) corresponding to a nominal interest rate r\displaystyle r compounded m\displaystyle m times a year is: E=(1+rm)m1E = \left(1 + \frac{r}{m}\right)^m - 1 Looking at the formula: - E\displaystyle E depends on the nominal rate of interest (r\displaystyle r). - E\displaystyle E depends on the number of conversion periods per year (m\displaystyle m). - E\displaystyle E does not contain the principal term (P\displaystyle P) at all, meaning it is independent of the amount of Principal. Thus, the effective rate of interest does not depend upon the **Amount of Principal**. Hence, **Option A** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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