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Tucson Bank offers to lend you $50,000 at a nominal rate of 12%, compounded monthly. The loan (principal plus interest)...

Tucson Bank offers to lend you $50,000 at a nominal rate of 12%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Phoenix Bank also offers to lend you the $50,000, but it will charge an annual rate of 10.8%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Tucson versus the rate charged by Phoenix?

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Answer #1

Tucson Bank EAR=(1+r/m)^m-1=(1+12%/12)^12-1=12.68%

Phoenix Bank EAR=10.8%

Tucson rate is higher by 12.68%-10.80%=1.88%

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