Mathematics of FinanceMCQPYQ June 24Question 1262 of 512
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Find the effective rate of interest if an amount of 40,000\displaystyle 40,000 deposited in a bank for 1\displaystyle 1 year at the rate of 10%\displaystyle 10\% compounded semi-annually

Options

A10.20%\displaystyle 10.20\%
B10.05%\displaystyle 10.05\%
C10.25%\displaystyle 10.25\%
D10.10%\displaystyle 10.10\%
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Correct Answer

Option c10.25%\displaystyle 10.25\%

All Options:

  • A10.20%\displaystyle 10.20\%
  • B10.05%\displaystyle 10.05\%
  • C10.25%\displaystyle 10.25\%
  • D10.10%\displaystyle 10.10\%

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Detailed Solution & Explanation

**Derivation of Effective Rate of Interest** Given: - Principal (P\displaystyle P) = Rs. 40,000\displaystyle \text{Rs. }40,000 (Note: Effective rate is independent of Principal) - Nominal Rate (r\displaystyle r) = 10%\displaystyle 10\% per annum compounded semi-annually - Time (t\displaystyle t) = 1\displaystyle 1 year **Step 1: Find periodic rate (i\displaystyle i) and number of periods (m\displaystyle m)** - Periodic rate i=10%2=5%=0.05\displaystyle i = \frac{10\%}{2} = 5\% = 0.05 - Number of periods m=2\displaystyle m = 2 **Step 2: Calculate Effective Rate (E\displaystyle E)** E=(1+i)m1E = (1 + i)^m - 1 E=(1+0.05)21E = (1 + 0.05)^2 - 1 E=(1.05)21E = (1.05)^2 - 1 E=1.10251=0.1025 or 10.25%E = 1.1025 - 1 = 0.1025 \text{ or } 10.25\% Hence, **Option C** 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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