Bill is considering a savings account which pays 2% interest compounded monthly. What is the effective annual yield? Enter your response as a percentage rounded to two decimal places and omit the percent sign (7.25% should be input as 7.25.)

The effective annual yield (EAY) for an interest rate that is compounded monthly can be calculated using the following formula:

\[
EAY = \left(1 + \frac{r}{n}\right)^n - 1
\]

Where:
- \( r \) is the nominal annual interest rate (in decimal form),
- \( n \) is the number of compounding periods per year.

Given:
- The nominal annual interest rate \( r = 2\% = 0.02 \),
- Compounded monthly, so \( n = 12 \).

Now, plug in the values:

\[
EAY = \left(1 + \frac{0.02}{12}\right)^{12} - 1
\]

Let's calculate that.The effective annual yield (EAY) for the savings account is **2.02**.

Would you like more details or have any questions about the calculation? 

Here are 5 related questions for further practice:
1. How would the effective annual yield change if the interest rate was 3%?
2. What happens to the EAY if the interest is compounded daily instead of monthly?
3. How would the formula change if the compounding was quarterly instead of monthly?
4. What is the EAY if the nominal rate is 5% and it is compounded monthly?
5. How do you compute EAY if interest is compounded continuously?

**Tip:** The more frequently interest is compounded, the higher the effective annual yield will be.

Bill is considering a savings account which pays 2% interest compounded monthly. What is the effective annual yield? Enter your response as a percentage rounded to two decimal places and omit the percent sign (7.25% should be input as 7.25).

Learn how to calculate the effective annual yield (EAY) for a savings account with a 2% nominal interest rate compounded monthly. This problem involves key financial concepts like compound interest and provides a step-by-step solution, suitable for high school students (Grades 10-12).

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