ICICI Bank offers a 1-Year Loan to a company at an interest rate of 20 percent payable at maturity, while Citibank offers on a discount basis at a 19% interest rate for the same period. How much should ICICI Bank decrease/increase the interest rate to match up the effective interest rate of Citibank?
1 Increase by 3.5%
2 Decrease by 1.8%
3 Increase by 1%
4 Decrease by 1.4%
A "discount note" subtracts the interest from the original amount borrowed, then at the end you pay back the amount "borrowed". So, for example, if you wanted to wind up with $1000 in hand from Ciitibank, at 19% interest (how old is this problem?) how much would you have to "borrow"? Well, if you borrowed A dollars for one year, you would have to pay 0.19A in interest so you would actually receive A- .19A= .81A= 1000. You would have to "borrow" A= 1000/.81= 1235 dollars. The interest would be $235. If, instead, you borrowed $1000 from ICICI Bank at "r" interest, you would have to pay 1000r= 235 to match that or r= 235/1000= 0.235 or 23.5%. ICICI Bank would have to increase interest by 3.5% in order to match Citibank's rate.
Originally Posted by mrsritukiranbv
I really appreciate you taking time in explaining how it works however is there an easier way to help me understand i am actually not very good at maths and this questions was asked in one of the entrance test for MBA (Masters in Business administration) by one of management institutes. Though the answer you gave was correct as per the solved answer sheet for this entrance exams but i am still not very clear as to how you reached to that conclusion. Is this question suppose to be related to increase% / decrease percent and discounts?