Q1. [1] § TERMS OF CREDIT
Read the following case and choose the correct option :
Megha has taken a loan of ₹ 5 lakhs from bank to purchase a house. The annual rate on the loan is 12% and loan is to be repaid in 5 years in monthly instalments.
The 12% interest charged by the bank to Megha is related to which of the following ?
- A Collateral
- B Cost of Credit
- C Duration of Loan
- D Documentation
Previously asked in CBSE board exam
2026 32/5/1 Q31
Generated by claude-sonnet-4-6 · 2026-06-15 06:52 · grounding rag
Model Answer
Option B: Cost of Credit
The 12% annual interest rate charged by the bank is the cost of credit. Interest rate is a key component of the terms of credit that the borrower must pay to the lender along with repayment of the principal.
Explanation
- The passage states that interest rate, collateral, documentation, and mode of repayment together form the terms of credit.
- Among the options, the interest rate specifically represents the cost of borrowing (cost of credit), not collateral, duration, or documentation.
- Examiners expect students to link "interest rate" directly to "Cost of Credit" — the price paid for using borrowed money.
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