Effective Yield and Interest Rates

This video tutorial explains the concept of effective yield, also known as the effective rate of interest or annual equivalent rate. It focuses on deriving the effective yield formula for continuous interest and demonstrates how to use this formula through examples. The tutorial reviews simple, compound, and continuous interest formulas and provides step-by-step calculations to determine the effective yield for accounts with 4% and 6% continuous interest rates.

What is another name for effective yield?

• Annual Percentage Rate

• Effective Rate of Interest

• Nominal Rate

• Discount Rate

What is the goal of determining the effective yield?

• To determine the future value of an investment

• To find the equivalent annual simple interest rate

• To calculate the compound interest

• To find the nominal interest rate

What is the effective yield for continuous interest?

• The future value of an investment

• The compound interest rate

• The equivalent annual simple interest rate

• The nominal interest rate

In deriving the effective yield formula, what is set equal to 1?

• The principal amount

• The time period

• The interest rate

• The future value

What is the formula for effective yield in continuous interest?

• R sub E = P(1 + r/n)^(nt)

• R sub E = P(1 + rt)

• R sub E = (1 + r)^t - 1

• R sub E = e^r - 1

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

• 4.12%

• 4.08%

• 4.04%

• 4.00%

How do you convert a decimal to a percentage?

• Divide by 100

• Subtract 100

• Multiply by 100

• Add 100

What is the effective yield for an account with 6% continuous interest?

• 6.18%

• 6.12%

• 6.06%

• 6.00%

What is the decimal equivalent of 6%?

• 0.06

• 0.60

• 0.006

• 6.00

What does an effective yield of 6.18% indicate?

• The account pays 6.18% nominal interest

• The account pays 6.18% simple interest

• The account pays 6.18% compound interest

• The account pays 6.18% discount interest