Question

Bank One offered ​20-year certificate of deposit​ (CD) at ​4.85% interest compounded quarterly. On the same day on the​ Internet, First Bank offered ​20-year CD at 4.84​% compounded monthly. Find the APY for each CD. Which bank paid a higher​ APY?

Answer 1

Which bank paid a higher​ APY?

First Bank pays a higher APY = 4.95%

Step-by-step explanation:

the annual percentage yield is the effective annual rate earned by a deposit, so we can use that formula to answer this question

effective annual rate Bank One (APY) = (1 + 4.85%/4)⁴ - 1 = 1.04939 - 1 = 0.04939 = 4.94%

effective annual rate First Bank (APY) = (1 + 4.84%/12)¹² - 1 = 1.049488 - 1 = 0.049488 = 4.95%