Question

An account with an initial balanceof $1,500.00 and a 2.50% interestrate has a balance of $1,537.93 atthe end of one year. What is theeffective annual yield?A. 2.50%B. 2.53%C. 2.47%D. 97.53%

Answer 1

From the question;

we are given

Initial balance = $1,500.00 and a 2.50% interest

This implies that the

interest rate = 2.50%

We are to find the effective annual yield

The effective annual yield is calculated using

$Y=(1+\frac{r}{n})^n-1$

Where

r = interest rate

n = number of compounds per year

Therefore

r = 2.5%

n = 1

Hence

$\begin{gathered} Y=(1+\frac{2.5}{1})^1-1 \\ Y=(3.5)^1-1 \\ Y=3.5-1 \\ Y=2.5 \end{gathered}$

Therefore the effective annual yield is 2.5%