Suppose ABC Bank offers to lend you $1,000 at a nominal rate of 8%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Bank XYZ also offers to lend you the $1,000, but it will charge 9%, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?

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.

answer; ///i believe the correct   answer is (e) transformational;