Bank A charges a 7.50 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 6.95 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

Effective interest rate for Bank A is 7.5% and for Bank B is 7.18%.

Explanation:

BANK A

Effective Rate = ((1 + i/m) ^n) - 1

Effective Rate = ((1 + 0.075/1) ^1) - 1

Effective Rate = ((1 + 0.075) ^1) - 1

Effective Rate = ((1.075) ^1) - 1

Effective Rate = 1.075 - 1

Effective Rate = 0.075

Effective Rate = 7.50%

BANK B

Effective Rate = ((1 + i/m) ^n) - 1

Effective Rate = ((1 + 0.0695/12) ^12) - 1

Effective Rate = 1.07176 - 1

Effective Rate = 0.07176

Effective Rate = 7.176% = 7.18%