Effective Yield and Compound Interest

This lesson covers the concept of effective yield, also known as the effective rate of interest or annual equivalent rate. It explains how to derive the effective yield formula for compound interest and provides examples of calculating effective yield for different compounding periods. The effective yield is the equivalent annual simple interest rate that yields the same return as compound interest after one year. The lesson includes step-by-step calculations for interest compounded quarterly and monthly.

What is another name for effective yield?

• Monthly interest rate

• Annual equivalent rate

• Simple interest rate

• Quarterly interest rate

What is the purpose of determining the effective yield?

• To find the equivalent annual simple interest rate

• To calculate monthly interest

• To determine the principal amount

• To find the total interest over two years

In deriving the effective yield formula, what is the time period set to?

• Six months

• Two years

• Five years

• One year

What is the first step in deriving the effective yield formula for compound interest?

• Set the time period to one year

• Determine the interest rate

• Calculate the principal amount

• Find the total interest

What is the effective yield for an account with 4% interest compounded quarterly?

• 4.06%

• 4.00%

• 3.90%

• 4.50%

How many times is interest compounded annually in the example with 4% interest?

• Twelve times

• Twice

• Once

• Four times

What is the decimal representation of 4% interest?

• 0.004

• 0.04

• 0.4

• 4.0

What is the effective yield for an account with 7% interest compounded monthly?

• 7.23%

• 7.00%

• 7.50%

• 6.90%

How many times is interest compounded annually in the example with 7% interest?

• Twice

• Four times

• Twelve times

• Once

What is the decimal representation of 7% interest?

• 7.0

• 0.007

• 0.7

• 0.07