Bank A offers to lend you $10,000 at a nominal rate of 6%, simple interest, with interest paid monthly. Bank B offers to lend you the $10,000, but it will charge 7%, simple interest, with interest paid at the end of the year. What is the difference in the effective annual rates charged by the two banks?

Question

Valentino Crawford

Business

17 July, 21:15

Bank A offers to lend you $10,000 at a nominal rate of 6%, simple interest, with interest paid monthly. Bank B offers to lend you the $10,000, but it will charge 7%, simple interest, with interest paid at the end of the year. What is the difference in the effective annual rates charged by the two banks?

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Answers (2)

Know the Answer?

Deanna Bryant · Answer 1

Bank A charges $600 annually while Bank B charges $700 annually

Explanation:

I = PRT/100

Bank A

P=$10,000, R=6%, T=1month=1/12 year

I = (10,000*6) / (12*100) = $50 monthly = $600 annually ($50*12 = $600)

Bank B

P=$10,000, R=7%, T=1year

I = (10,000*7) / 100 = $700 annually

Morgan Christian · Answer 2

Michelle needs to calculate the interest for the length of each loan. Bank A will charge $2430 in interest and Bank B will charge $1980 in interest. She will save by borrowing from Bank B.