Question

Michelle invests in a savings account that pays 8% interest compounded monthly. What is the effective annual yield for this account?

a) 8%
b) 8.16%
c) 8.24%
d) 8.33%

Answer 1

To calculate the effective annual yield for a savings account with 8% interest compounded monthly, we need to use the formula for compound interest.

Step-by-step explanation:

To calculate the effective annual yield for a savings account with 8% interest compounded monthly, we need to use the formula for compound interest:

A = P(1 + r/n)^(nt)

Where:

• A is the future value of the investment
• P is the principal amount (initial deposit)
• r is the annual interest rate (as a decimal)
• n is the number of times interest is compounded per year
• t is the number of years

Plugging in the values, we have:

A = P(1 + r/n)^(nt) = 1(1 + 0.08/12)^(12*1) = 1(1.0066667)^12 ≈ 1.0833

Multiplying by 100 to convert to a percentage, the effective annual yield is approximately 8.33%