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Barber Vaughan
11/08/2023 · Primary School

6. When previously earned interest is added to an investment and then allowed to earn more interest, we say that the interest is compounded. Compounding interest in- creases the effective interest rate of an investment compared to simple interest, where the interest earned is not added to the investment to earn additional interest. The annual percentage yield, or APY, gives the effective interest rate on an investment based on the number of times the interest is compounded in a year, \( n \), and the inter- est rate, \( r \), as a decimal. APY \( =\left(1+\frac{r}{n}\right)^{n}-1 \) Find the annual percentage yield if the interest rate is \( 4 \% \) and interest is compounded monthly. State the answer as a percent rounded to the nearest hundredth.

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The annual percentage yield is \(4.07\%\).

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