Question

Suppose a savings and loan pays a nominal rate of 1.2% on savings deposits. Find the effective annual yield of interest is compounded annually.

Answer 1

Answer:

1.2%

Step-by-step explanation:

-The effective annual rate of interest is calculated using the formula;

$i_m=(1+i/m)^m-1$

where:

• $i_m$ is the effective annual rate.
• $i$ is the stated nominal rate
• $m$ the number of compounding in a year.

Therefore:

$i_m=(1+0.012/1)^1-1\\\\=0.012=1.2\%$

Hence, the effective rate is equivalent to the nominal rate if there is only one compounding per year and is 1.2%