A bill of Rs. 20000 is due in 3 months. If the Banker's Discount is Rs. 300, wha

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Question: A bill of Rs. 20000 is due in 3 months. If the Banker\'s Discount is Rs. 300, what is the effective interest rate?

Options:

Correct Answer: 4%

Solution:

Effective Interest = (Banker\'s Discount / Face Value) * (12 / Time) = (300 / 20000) * (12 / 3) = 4%

A bill of Rs. 20000 is due in 3 months. If the Banker's Discount is Rs. 300, what is the effective interest rate?

A bill of Rs. 20000 is due in 3 months. If the Banker's Discount is Rs. 300, what is the effective interest rate?

Step 1: Identify the given values. The face value of the bill is Rs. 20000, the Banker's Discount is Rs. 300, and the time until the bill is due is 3 months.
Step 2: Understand the formula for calculating the effective interest rate. The formula is: Effective Interest = (Banker's Discount / Face Value) * (12 / Time).
Step 3: Substitute the values into the formula. Replace Banker's Discount with 300, Face Value with 20000, and Time with 3 months.
Step 4: Calculate the fraction of the Banker's Discount to the Face Value. This is 300 / 20000.
Step 5: Calculate the time factor. Since the time is 3 months, convert it to years by using 12 / 3, which equals 4.
Step 6: Multiply the results from Step 4 and Step 5 together. This gives you (300 / 20000) * 4.
Step 7: Perform the final calculation. The result is 0.04, which is equivalent to 4%.
Step 8: Conclude that the effective interest rate is 4%.

Banker's Discount – The difference between the face value of a bill and the present value, which is calculated based on the time until the bill is due.
Effective Interest Rate – The interest rate that reflects the true cost of borrowing, taking into account the time period and the discount applied.
Time Value of Money – The principle that money available now is worth more than the same amount in the future due to its potential earning capacity.