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7 August, 17:33

Bank A offers to lend you $1,000,000 at a nominal rate of 6%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Bank B also offers to lend you the $1,000,000, but it will charge 6.40%, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks

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  1. 7 August, 18:03
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    Bank A:

    Real rate = 6.168%

    Bank B:

    Real rate = 6.4%

    Explanation:

    Giving the following information:

    Bank A:

    Annual nominal rate = 6% compounded monthly

    Bank B:

    Annual rate = 6.4%

    The period that we will use to compare is one year.

    Bank A:

    Nominal rate = 0.06/12 = 0.005

    Real rate = [ (1.005^12) - 1] = 0.06168 = 6.168%

    Bank B:

    Real rate = 6.4%
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