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# Effective annual interest rates

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Bank A offers to lend \$10,00 at a nominal rate of 7%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Bank B also offers to lend the \$10,000, but it will charge 8%, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?

If there is an Excel formula for this I would appreciate to know it as well.

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#### Solution Preview

See the attached file.
Bank A offers to lend \$10,00 at a nominal rate of 7%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Bank B also offers to lend the \$10,000, but it will charge 8%, with ...

#### Solution Summary

The difference in effective annual interest rates charged by two banks has been calculated. EXCEL worksheet function EFFECT that can be used for calculating the effective annual interest rate has also been explained.

\$2.49