You have just invested in a Bank FD which carries an interest rate of 10% per year, paid every quarter.
So, if you invested Rs. 10,000 in this FD, at 10% a year, you get Rs. 1,000 for a year. Since the interest is paid out every quarter or 3 months, you get Rs. 250 every quarter.
Now, what is the value of your investment at the end of Month 1, Month 2 and Month 3?
OK.
What if I say that at the end of Month 1, the value of your investment is Rs. 10,083.33, at the end of Month 2, it is 10,166.67 and at the end of month 3, it is Rs. 10,250.
You shake your head in disagreement.
“What nonsense is this? I am getting the interest only at the end of month 3, so why are you doing this trick?”
Well, it does look like a trick but a perfectly legal one.