Question

An account with an initial balance of $2000 and a 2.80% interest rate has a balance of $2056.72 at the end of one year. What is the effective annual yield?

Answer 1

The effective annual yield is calculated by determining the interest earned, dividing it by the initial balance, and expressing it as a percentage. The yield for the account in question is 2.836%.

Step-by-step explanation:

The student's question pertains to calculating the effective annual yield of an account with an initial balance and a given interest rate.

To find the effective annual yield, we use the ending balance and the initial balance to calculate the percentage increase over the year. Here's the step-by-step calculation:

• Determine the amount of interest earned by subtracting the initial balance from the ending balance: $2056.72 - $2000 = $56.72.
• Calculate the effective annual yield (EAY) by dividing the interest earned by the initial balance and then multiplying by 100 to get a percentage: ($56.72 / $2000) × 100 = 2.836%.

The effective annual yield on the account, therefore, is 2.836%.