Final answer:
The statement about APY calculation is false; APY considers the effect of compounding interest, not just the addition of the deposit to the nominal interest rate. The formula for APY includes the nominal rate and the number of compounding periods, which provides a different result from simple interest calculations.
Step-by-step explanation:
The assertion that the Annual Percentage Yield (APY) is calculated by simply adding the amount of the deposit to the nominal interest rate is false. The APY is a measure that reflects the real rate of return on an investment, taking into account the effect of compounding interest. Unlike simple interest, where interest is only calculated on the initial principal, compounding involves the process where interest is earned on both the original deposit and on any interest already accrued. The calculation for APY can be represented by the formula:
APY = (1 + r/n)n - 1
Here, 'r' is the nominal interest rate and 'n' is the number of compounding periods per year.
For instance, if you have a deposit of $100 with an annual nominal interest rate of 5% compounded annually, the APY would be calculated as follows:
APY = (1 + 0.05/1)1 - 1 = 0.05 or 5% APY
This is different from using the simple interest formula, where you would calculate the interest without considering compounding effects, as in the given example where $100 deposited at a simple interest rate of 5% held for one year yields $5 in interest:
$100 × 0.05 × 1 = $5
Financial investors often seek higher rates for investments like CDs compared to savings accounts due to the reduced liquidity of such investments, as mentioned in the context of CD rates and savings accounts provided.