I think this is a friendship that is coming to an end; the girls have different schools, friends and homes and they are moving in different directions; one is more reluctant to move on than the other. Naturally you are horrified at what you have learned, but you need to give this girl a chance to explain herself. You have known her for eight years, observed her at close quarters in your own home, yet gone from thinking her to be 'perfect inside and out' ( not a very sensible comment to make about a child) to calling her 'evil, manipulative, controlling and a bully' based purely on what your grand daughter has said. She may well have changed, but have you personally seen any evidence of this?
Bullying flourishes in a climate of secrecy and needs to be tackled quickly, openly and fairly. At the very least you need to explain to the other girl why she is no longer welcome in your house, and listen to what she has to say.
You must also persuade your grand daughter to discuss it with her parents.
Fascinating causes of death 1632
Is it normal to talk to yourself?
I probably can't, actually. GillyBob suggested talking about an imaginary scenario, and that seems a reasonable way to go. Something about how nobody should be bullied, what the girls' ideas are about what constitutes bullying, and asking if they can think of anyone who may feel bullied. Ask them what they think someone who is bullied should do, make some suggestions, including the fact that the police can be bought in.