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Which of the following represents the effective annual yield for an account that pays 7% interest compounded monthly?

A) 7.00
B) 7.25
C) 7.20
D) 7.50

User Kunal Raut
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1 Answer

2 votes

Final answer:

The effective annual yield for an account with 7% interest compounded monthly is calculated using the formula for effective annual rate (EAR), and the result is approximately 7.23%. Therefore, the closest answer option is B) 7.25.

Step-by-step explanation:

The question asks for the effective annual yield for an account that pays 7% interest compounded monthly. To find this, we use the formula for effective annual rate (EAR), which is (1 + r/n)n−1, where ‘r’ is the annual interest rate (expressed as a decimal), and 'n' is the number of times the interest is compounded per year.

In our case, with an annual interest rate of 7% (or 0.07 as a decimal) compounded monthly, 'n' is 12. So the effective annual rate is (1 + 0.07/12)12−1. Calculating this gives us approximately 1.0723 or 7.23%.

Therefore, the correct answer is B) 7.25, which is the closest option to the calculated effective annual yield.

User Pjdupreez
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