Mathematics of FinanceMCQPYQ Nov 19Question 1198 of 512
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Find the effective rate of interest on Rs. 10,000\displaystyle \text{Rs. }10,000 on which interest is payable half yearly at 5%\displaystyle 5\% p.a.

Options

A5.06%\displaystyle 5.06\%
B4%\displaystyle 4\%
C0.4%\displaystyle 0.4\%
D3%\displaystyle 3\%
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Correct Answer

Option a5.06%\displaystyle 5.06\%

All Options:

  • A5.06%\displaystyle 5.06\%
  • B4%\displaystyle 4\%
  • C0.4%\displaystyle 0.4\%
  • D3%\displaystyle 3\%

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Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Principal (P\displaystyle P) = Rs. 10,000\displaystyle \text{Rs. }10,000 (Note: The effective rate of interest does not depend on the principal) - Nominal Rate (r\displaystyle r) = 5%\displaystyle 5\% per annum - Compounding Frequency = Half-yearly (m=2\displaystyle m = 2) **Step 1: Find periodic interest rate (i\displaystyle i)** i=rm=5%2=2.5%=0.025 per periodi = \frac{r}{m} = \frac{5\%}{2} = 2.5\% = 0.025 \text{ per period} **Step 2: Calculate the effective rate of interest (E\displaystyle E)** E=(1+i)m1E = (1 + i)^m - 1 E=(1+0.025)21E = (1 + 0.025)^2 - 1 E=(1.025)21E = (1.025)^2 - 1 E=1.0506251=0.050625 or 5.0625%5.06%E = 1.050625 - 1 = 0.050625 \text{ or } 5.0625\% \approx 5.06\% 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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