Question

Consider an account with an APR of 6.8​%. Find the APY with quarterly​ compounding, monthly​ compounding, and daily compounding. Comment on how changing the compounding period affects the annual yield. When the interest is compounded quarterly," What is the APR"?

Answer 1

We know APY=(1+APR/n)^n-1G180G190G167:G177

Where n = comounding frequency

Given APR =6.8%

For Qtrly compounding n=4

APY =(1+6.8%/4)^4-1

APY =6.98%

For monthly compounding n=12

APY =(1+6.8%/12)^12-1

APY =7.02%

For daily compounding n=365

APY =(1+6.8%/365)^365-1

APY = 7.04%

When the compounding periods increase, the frequency of

compounding increases. APR % is the interest rate when

simple interest is considered or componding is done once a year.

As the no of componding perios increases , the APY increases.

When the interest is compounded quarterly, the APR does not

change, only the APY will change considering the corresponding

APR aret for a quarter in compounded 4 times.