Apy aprperiodicinterestratetimesnumberof periods

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Unformatted text preview: Money market mutual funds are offered by your broker or even your bank Mutual funds pool money and invest in U.S. treasuries (very safe) Short term commercial paper (CP) issued by major corporations with low risk of default Tend to yield a slightly better return Money market accounts issued by banks ARE insured 31 while money market mutual funds are NOT generally After Tax Rate of Return Yield on savings times (1 minus tax rate) 6% times (1 ­ .25) .06 times .75 = .045 or 4.5% So even if you are earning 6%, after you pay taxes on the interest you earn you are actually earning only 4.5% after you pay taxes on the interest 32 What is “Truth in Savings?” Requires Disclosure of... Fees on deposit accounts The interest rate The annual percentage rate Interest must be compounded on the full principal amount in the account each day Sets formulas for computing the APY Establishes rules for advertising accounts 33 APR vs. APY APR Annual percentage rate APY Annual percentage yield of effective interest rate 34 APR vs. APY APR = Periodic interest rate times number of periods Annual interest rate of 10% paid annually = 10% APR (.10 x 1) Annual interest rate of 10% paid monthly; the periodic rate is .10/12 or . 00833/month. The APR is .00833 x 12 or 10% Which scenario is best for investors???? 35 APR vs. APY \$1,000 invested for one year at 10% APR with: Annual compounding = \$100.00 of interest Monthly compounding = \$104.71 of interest Daily compounding = \$105.16 of interest # perio...
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This document was uploaded on 02/12/2014.

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