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?

Lesson Objective

Determine the annual percentage yield.

Content Vocabulary

annual percentageyield (APY) annual percentage yield (APY)

The rate of return on your investment for a one-year period.

annual percentage yield (APY)

The rate of return on your investment for a one-year period.

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 1Example 1

Find the interest for 1 year. (Refer to the Amount of $1.00 Invested—Daily, 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: Example 1 Answer: Step 1Step 1

Find the effective annual yield.

Interest for 1 Year Principal

$319.90 $5,000.00 = 0.06398 or 6.398%

Example 1 Answer: Example 1 Answer: Step 2Step 2

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 2Example 2

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: Example 2 Answer: Step 1Step 1

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: Example 2 Answer: Step 1 (cont.)Step 1 (cont.)

Compare the two.

The better investment is 5 percent quarterly.

Example 2 Answer: Example 2 Answer: Step 2Step 2

Refer to the Amount of $1.00 Invested—Daily, 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 1Practice 1

4.75% compounded monthly is the better investment.

Practice 1 AnswerPractice 1 Answer