Question

A passbook savings account has a rate of 10%. Find the effective annual yield, rounded to the nearest tenth of a percent, if the interest is compounded monthly.

Answer 1

Effective Annual Yield : 10.5%

Effective Annual Yield

​ In the case of monthly there are 12 months in a year. Therefore, making n=12. So, the effective annual yield if the interest 10% is compounded monthly is given as r=10, n=12;

`Y= (1 +(r)/(n)) ^(n)-1 = (1 +(0.1)/(12)) ^(12)-1\\ =(1 +0.00833) ^(12)-1\\ =(1.00833) ^(12)-1\\ = 1.10466 -1\\ = 0.10466`

But, this is decimal form, to convert it to the percentage form we have to multiply the decimal form by 100 and finally, place "%" after the last digit of the number. That is,

Y= 0.10466× 100%

Y=10.46% or 10.5%

Effective Annual Yield : 10.5%