A money lender claims to lend money at the rate of 10 per annum simple interest However he takes the...........

Quantitative Aptitude (CPO) Simple Interest

A money lender claims to lend money at the rate of 10% per annum simple interest. However, he takes the interest in advance when he lends a sum for one year. At what interest rate does he lend the money actually?

10%

10 1/9%

11%

11 1/9%

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Explanation:

Let’s break it down:

- The lender says 10% simple interest per year, but he actually takes the whole year’s interest *upfront*, so he hands over less money than promised for the same loan.

- If you borrow ?100, he takes ?10 as interest right away and gives you only ?90—but at year end, you pay back ?100.

- So, the real interest you’re paying is ?10 (interest) on ?90 (amount actually received):

Actual Rate = (10/90) × 100% = 11.11...%, or 11 1/9%

- Let’s look at the choices:

1. 10% ? This is the nominal rate, but not the real one.

2. 10 1/9% ? Close, but not what our math says.

3. 11% ? Still not quite.

4. 11 1/9% ? This is the actual rate you’re paying.

Correct Answer: Option 4—11 1/9%.