You want to borrow $1,000 from a friend for one year,and you propose to pay her $1,120 at the end of the year.She agrees to lend you the $1,000,but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month.How much higher is the effective annual rate under your friend's proposal than under your proposal?
A) 0.00%
B) 0.45%
C) 0.68%
D) 0.89%
E) 1.00%

Question

Quizplus · Accepted Answer

Under your proposal, you are paying $120 more than you borrowed over the course of one year, which implies an effective annual rate of 12%. 
Under your friend's proposal, you are paying a total of $1,120, which includes $110 of interest over the course of 11 months, and an additional $1,010 at the end of the 12th month. This implies an effective annual rate of approximately 12.68%. 
The difference between the two rates is 0.68%.

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