Question

Suppose a savings and loan pays a nominal rate of 1.2% on savings deposits. Find the effective annual yield of interest is compounded annually.

Answer 1

1.2%

Explanation:

-The effective annual rate of interest is calculated using the formula;

`i_m=(1+i/m)^m-1`

where:

• 
  `i_m` is the effective annual rate.
• 
  `i` is the stated nominal rate
• 
  `m` the number of compounding in a year.

Therefore:

`i_m=(1+0.012/1)^1-1\\\\=0.012=1.2\%`

Hence, the effective rate is equivalent to the nominal rate if there is only one compounding per year and is 1.2%