Question

Marit Brunsell deposited $50,000 at Bank of America at 16% interest compounded quarterly. What is the effective rate (APY)? (Do not round intermediate calculations. Round your answer to the nearest hundredth percent.) Effective rate

Answer 1

Here we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value, PV = Present value = $50000, r = rate of interest = 16% compounded quarterly. So quarterly rate = 16% /4 = 4%, n= time period = 1 * 4 = 4 quarters

now, putting theses values in the above equation, we get,

FV = $50000 * (1 + 4%)⁴

FV = $50000 * (1 + 0.04)⁴

FV = $50000 * (1.04)⁴

FV = $50000 * 1.16985856

FV = $58492.928

Interest = Future value - Present value

Interest = $58492.928 - $50000 = $8492.928

Now, Effective rate = Interest / Present value * 100

Effective rate = $8492.928 / $50000 * 100 = 16.99%