Question 11.I-B.2: For the facts in Illustration 11-B.1, compute the interest r......

IR = \frac{12 ×13}{36×37} × Rs 312 = Rs 36.54
Compared to the ERI method, the IR is lower in the case of the rule of 78 method. The implication of lower interest rebate is that the effective rate of interest on the completed transaction will be higher than what was implicit in the original transaction. When the interest rebate is calculated according to the ERI method, the implicit rate of interest is the same as the rate of interest implicit in the original transaction. For instance, for the facts in Illustration 11-B.1, the effective rate of interest implied by the completed transaction (Ei), according to the ERI method
\,  = Rs 30.89 × 12 × PVIFA_\mathrm{m} (Ei,2) + (Rs 370.67 – Rs 42) × PVIF (Ei,1) = Rs 800
\, By trial and error and interpolation, Ei = 25.38 per cent
\,  If the interest rebate is calculated on the basis of the rule of 78 method, Ei = Rs 30.89 × 12 × PVIFA_\mathrm{m} (Ei,2) + (Rs 370.67 – Rs 36.5) × PVIF (Ei,2) = Rs 800
\,  By trial and error and interpolation, Ei = 26 per cent, that is, marginally higher than what is implicit in the original transaction.

Modified Rule 78 Method   According to this method, finance companies allow for a deferment period for the repayment of the outstanding amount. Accordingly,

IR = \frac{(T – dp)(t – d +1)}{n(n+1)} × D = 0, where dp = deferment period