Question

Drill Problem 12-5 (Algo) [LU 12-1 (3)]

Principal: $17,800
Interest rate: 16%
Compounded quarterly
Calculate the effective rate (APY) of interest for 1 year. (Use the Table provided.)
Note: Do not round intermediate calculations. Round your final answer to the nearest hundredth percent.
Effective rate

Answer 1

The effective interest rate (APY) for an investment at 16% compounded quarterly is 16.99%.

The steps for determining the effective interest rate (APY) are as follows:

Determine the stated interest rate (APR)

Determine the number of compounding periods

Apply the Effective interest rate Formula: APY = (1+ r/n)^n – 1.

The formula for calculating the effective rate (APY) is
`(1 + r/n)^n - 1`,

Where r = period rate and n = number of compounding periods.

Principal: $17,800

Interest rate (APR): 16%

Compounding period: quarterly

APY = (1 + 0.16/4)^4 - 1

APY = (1.04)^4 - 1

APY = 1.16985856 - 1

APY = 16.99%