Multiple Choice
Which financial activity helps a company based in another country raise capital in the domestic market?
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7. Receivables and Investments
Introduction to Investments in Securities
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What is the annual percentage yield (APY) for a one-year \$4,000 investment in a security that pays 5% interest compounded annually?
A
5.00%
B
5.12%
C
4.88%
D
4.75%
Verified step by step guidance1
Understand the concept of Annual Percentage Yield (APY): APY represents the effective annual rate of return taking into account the effect of compounding interest. It is calculated using the formula: APY = (1 + r/n)^n - 1, where r is the nominal interest rate, and n is the number of compounding periods per year.
Identify the given values in the problem: The nominal interest rate (r) is 5% or 0.05, the investment period is one year, and the compounding frequency (n) is annually, meaning n = 1.
Substitute the values into the APY formula: APY = (1 + 0.05/1)^1 - 1. This simplifies to APY = (1 + 0.05)^1 - 1.
Perform the calculation inside the parentheses first: Add 1 to 0.05 to get 1.05.
Raise the result to the power of 1 (since compounding is annual) and subtract 1 to find the APY. This will give the effective annual yield for the investment.
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