A dishonest financier claims to be lending money at simple interest, but he includes the interest every four months for calculating the principal. If he is charging an interest of 3%, the effective rate of interest becomes:

Correct option is C

Given:

Rate of interest annually = 3%

Interest included at every 4 months

Formula Used:

​$$SI = \frac{P \times R \times T}{100}$$​​

Amount = Principle + Interest

Solution:

Let the sum be 100

Rate of interest for every 4 months =$$\frac{3}{3} = 1\%$$

Here T will be 1 for a period of four months

Interest for first 4 months = $$\frac{ 100 \times 1 \times 1}{100} = 1$$​​

Amount = 100+1 = 101

New Principle for next 4 months =$$\frac{101 \times 1 \times 1}{100} = 1.01$$​​

Amount = 101+1.01= 102.01

Interest for the last 4 months =$$\frac{102.01 \times 1 \times 1}{100} = 1.0201$$​​

Amount = 102.01+1.0201 = 103.0301

Overall Interest = 103.0301 - 100 = 3.0301

Effective rate of interest =$$\frac{3.0301}{100} \times 100 = 3.03\%$$​​