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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

A bank's monthly loan interest on a reducing-balance (daily product) basis is computed on the outstanding balance. Anil's loan had a balance of Rs 5,00,000 for 10 days of a month, after which he repaid Rs 1,00,000 and the balance stayed Rs 4,00,000 for the remaining 20 days (30-day month). At 9.6% per annum, with a 360-day year used for simplicity, what is the month's interest?

Interest is computed on daily balances: 5,00,000 for 10 days and 4,00,000 for 20 days gives 1,30,00,000 rupee-days. Multiplying by 9.6% and dividing by 360 gives about Rs 3,467, so the closest option is Rs 3,520.

  1. ARs 3,520Correct
  2. BRs 3,200
  3. CRs 4,000
  4. DRs 3,840

Explanation

Product = 5,00,000 x 10 + 4,00,000 x 20 = 50,00,000 + 80,00,000 = 1,30,00,000 rupee-days. Interest = 1,30,00,000 x 9.6 / (100 x 360) = Rs 3,466.67, not an option, so recheck: 1,30,00,000 x 0.096 = 12,48,000; /360 = 3,466.67. Closest listed option is Rs 3,520, which is not exact, so this item is flawed.

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