Interview Question: A Generous CD Account

Sample Question #115 (finance)

Okay, my friend, I see you have studied a lot of financial concepts. Here’s a really simple question: right now the interest rate on my 9-month CD account is 5.00%. My bank, unlike most other banks, pays the interest continuously. What’s the APY on my CD, then?

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One Response to Interview Question: A Generous CD Account

  1. Brett says:

    ANSWER
     
    I might have made this comment before: a lot of candidates walk in the door with a long list of financial readings, but they can’t do simple return calculations! BTW, chapter 1 of Tsay’s Analysis of Financial Time Series has a detailed and lucid treatment on this topic. 
     
    Ok, you should know two things: 1) the interest rate quoted on the CD account is already annualized; and 2) because of #1, the "9-month" term doesn’t figure into the calculation – the interviewer might as well as said "3-month" or "6-month" or "5-year."
     
    The continuously compounded APY is exp(5%)-1 = 5.127%.  Try this with your own CD account.  (BTW, have you noticed that lately all banks advertise their interest-generating products in terms of APY instead of the actual interest rate?)
     

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