Question

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?

Answer 1

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.

Answer 2

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

Step-by-step 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