Reference no: EM13146509

Suppose that on Jan 1 you lend $50,000 to a bank (deposit $50,000 in a savings account). The savings account is paying 4% annual interest rate paid quarterly. 1. Use the simple interest rate formula: PV = FV/(1+i) to calculate the interest rate that you actually received. In banking jargon the 4% shown above is called the interest “rate” and what you are calculating here is called the “yield”. 2. The difference between the interest “rate” and the “yield” is due to compounding; that is, how often the interest is paid. Since it is paid in the spring the July interest payment includes interest paid on the April interest. If the interest is paid more often, say monthly, will the yield be higher or lower or unchanged? 3. Calculate the yield if interest is compounded monthly.