Question

6.Mr smith is opening a one-year cd for $25,000.00. The interst compounds daily. She told by the bank representative that the annual percentage rate is 1.65%. What is the annual percentage yield (APY) for this accounting?

Answer 1

Remember that APR is calculated using the following formula:

$\text{APR}=r\times p$

Where:

• r is the periodic rate

,

• p is the number of periods in a year

And APY is calculated using the following formula:

$\text{APY}=(1+p)^r-1$

Where:

• r is the periodic rate

• p is the number of periods in a year

Compounding daily, well have that

$\begin{gathered} \text{APR}=365r\rightarrow0.0165=365r\rightarrow r=0.000045 \\ \end{gathered}$

Using such values for p and r, let's calculate the APY

$\text{APY}=(1+0.000045)^{365}-1\text{ }\rightarrow\text{ APY=}0.0166$

Therefore,

1.65% APR = 1.66% APY