Answer:
The difference in the effective annual rates charged by the two banks is:
0.7%.
Explanation:
a) Data and Calculations:
ABC Bank lending = $1,000
Rate of interest = 8% compounded monthly
Effective monthly rate of interest = 8%/12 = 0.667
FV (Future Value) $1,083.00
PV (Present Value) $1,000.00
N (Number of Periods) 12.000
I/Y (Interest Rate) 0.667%
PMT (Periodic Payment) $0.00
Starting Investment $1,000.00
Total Principal $1,000.00
Total Interest $83.00
Effective annual interest rate = $83/$1,000 * 100 = 8.3%
Bank XYZ lending = $1,000
Rate of interest = 9% annually
FV (Future Value) $1,090.00
PV (Present Value) $1,000.00
N (Number of Periods) 1.000
I/Y (Interest Rate) 9.000%
PMT (Periodic Payment) $0.00
Starting Investment $1,000.00
Total Principal $1,000.00
Total Interest $90.00
Effective annual interest = 9%
Difference in rates = 9% - 8.3% = 0.7%
b) Bank XYZ charges more interest by 0.7% thank ABC Bank.
