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Planning for the Future How you spend and invest your money can have an impact on your lifestyle at a later time. What might you want to start saving for in the near future?

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Lesson Objective Determine the annual percentage yield. Content Vocabulary annual percentage yield (APY) The rate of return on your investment for a one-year period.

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Randall Raye invested $5,000 in a certificate of deposit for 3 years. The certificate earns interest at an annual rate of 6.25 percent compounded quarterly. What is the effective annual yield to the nearest thousandth of a percent? Example 1

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Find the interest for 1 year. (Refer to the Amount of $1.00 InvestedDaily, Monthly, and Quarterly Compounding table on page 800 of your textbook.) Amount – Principal ($5,000.00 × 1.063980) – $5,000.00 $5,319.90 – $5,000.00 = $319.90 Example 1 Answer: Step 1

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Find the effective annual yield. Interest for 1 Year Principal $319.90 $5,000.00 = 0.06398 or 6.398% Example 1 Answer: Step 2

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Galeno Villarreal can invest $10,000 at either 4.75 percent compounded daily for 4 years or 5 percent compounded quarterly for 4 years. Based on an effective annual yield, which is the better investment? Example 2

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Find the interest for 1 year and the annual yield. Daily: ($10,000 × 1.048643) – $10,000.00 $10,486.43 – $10,000 = $486.43 Yield: $486.43 ÷ $10,000.00 = 0.048643 or 4.864% Example 2 Answer: Step 1

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Quarterly: ($10,000 × 1.050945) – $10,000.00 $10,509.45 – $10,000 = $509.45 Yield: $509.45 ÷ $10,000.00 = 0.050945 or 5.095% Example 2 Answer: Step 1 (cont.)

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Compare the two. The better investment is 5 percent quarterly. Example 2 Answer: Step 2

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Refer to the Amount of $1.00 InvestedDaily, Monthly, and Quarterly Compounding table on page 800 of your textbook. Round effective annual yield to the nearest thousandth of a percent. Derek Carter can invest $20,000 at either 4.5 percent compounded daily for 1 year or 4.75 percent compounded monthly for 1 year. Based on an effective annual yield, which is the better investment? Practice 1

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4.75% compounded monthly is the better investment. Practice 1 Answer

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Financial Algebra © 2011 Cengage Learning. All Rights Reserved. Slide 1 3-5 COMPOUND INTEREST FORMULA Become familiar with the derivation of the compound.

Financial Algebra © 2011 Cengage Learning. All Rights Reserved. Slide 1 3-5 COMPOUND INTEREST FORMULA Become familiar with the derivation of the compound.

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