It is decided that a loan of 10,000 will be paid off at the rate of 800 per month in 15 equal instalments. Find out the rate of r…

Question

It is decided that a loan of 10,000 will be paid off at the rate of 800 per month in 15 equal instalments. Find out the rate of return on investment.

1. A. 16% P.a. (Correct answer)
2. B. 18% P.a.
3. C. 15% P.a.
4. D. 17% P.a.

Correct Answer

Option A — 16% P.a.

Detailed Solution & Explanation

The correct answer is 16% P.a..

Key Points

• Total repayment = 15 x 800 = 12000; interest = 2000 on 10000 over 15 months.
• Using the instalment interest method this works out to approximately 16% p.a.

Additional Information

• Total repaid = 15 × 800 = ₹12,000 against a loan of ₹10,000, so the interest is ₹2,000 over 15 months.
• Because the loan is repaid gradually, the borrower does not hold ₹10,000 for the whole term. The average outstanding balance over equal instalments is roughly half the principal, so the effective rate is about double the flat rate.
• Flat calculation: 2,000 on 10,000 over 15 months = 20% for 1.25 years = 16% per annum flat — which is the figure the options are testing.
• Distinguish the two rates in general: a flat rate charges interest on the original principal throughout, while a reducing-balance rate charges only on the outstanding amount. For the same cash flows the reducing-balance rate is close to twice the flat rate.