Problem:

Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year.

Required:

Question: What is the difference in the effective annual rates charged by the two banks?

Note: Provide support for your rationale.