A bill of Rs. 20000 is due in 1 year. If the bankers' discount is Rs. 1600, what

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Question: A bill of Rs. 20000 is due in 1 year. If the bankers\' discount is Rs. 1600, what is the effective rate of interest?

Options:

Correct Answer: 8%

Solution:

Effective Rate = (BD × 100) / (Face Value × Time) = (1600 × 100) / (20000 × 1) = 8%.

A bill of Rs. 20000 is due in 1 year. If the bankers' discount is Rs. 1600, what is the effective rate of interest?

A bill of Rs. 20000 is due in 1 year. If the bankers' discount is Rs. 1600, what is the effective rate of interest?

Correct Answer: 8%

Step 1: Identify the given values. The face value of the bill is Rs. 20000, the bankers' discount (BD) is Rs. 1600, and the time is 1 year.
Step 2: Use the formula for effective rate of interest: Effective Rate = (BD × 100) / (Face Value × Time).
Step 3: Substitute the values into the formula: Effective Rate = (1600 × 100) / (20000 × 1).
Step 4: Calculate the denominator: 20000 × 1 = 20000.
Step 5: Calculate the numerator: 1600 × 100 = 160000.
Step 6: Divide the numerator by the denominator: 160000 / 20000 = 8.
Step 7: The effective rate of interest is 8%.

Bankers' Discount – The discount allowed by a banker on a bill of exchange, calculated on the face value.
Effective Rate of Interest – The actual interest rate that is earned or paid on a loan or investment, taking into account the effect of compounding.
Time Value of Money – The concept that money available now is worth more than the same amount in the future due to its potential earning capacity.