You deposit $4,000 in a savings account with a 5% annual interest rate compounded monthly . What is the APY?
The Annual Percentage Yield (APY) is a more accurate measure of the actual return on an investment because it takes into account the effect of compounding.
To calculate the APY for a savings account with a 5% annual interest rate compounded monthly, you can use the formula:
APY = (1 + (r/n))^n - 1
where:
r = annual interest rate (5% = 0.05)
n = number of times interest is compounded per year (monthly = 12)
Plugging in the values:
APY = (1 + (0.05/12))^12 - 1
APY = (1 + 0.00416666667)^12 - 1
APY = (1.00416666667)^12 - 1
APY = 1.05116189768 - 1
APY = 0.05116189768
So, the Annual Percentage Yield (APY) for the savings account is approximately 5.12%.