1. If you invest $1000 in a CD at 4% annual interest, compounded quarterly, what is the corresponding APY?
In 1 year you will earn interest 4 times, earning 4/4=1% each time:
| When | How much earning interest | % earned | $ interest earned |
| 1st quarter | 1000 | 1 | .01*1000=$10 |
| 2nd quarter | 1010 | 1 | $10.10 |
| 3rd Q | 1020.10 | 1 | $10.20 |
| 4th Q | 1030.30 | 1 | $10.30 |
total interest earned in 1 year is $40.60
As an anual interest rate that would be 40.60/1000=.0406 or 4.06%
APY is 4.06%
2. If you invest $2000 in a CD at 5% annual interest, compounded quarterly, what is the corresponding APY?
In 1 year you will earn interest 4 times, earning 5/4=1.25% each time:
| When | How much earning interest | % earned | $ interest earned |
| 1st quarter | 2000 | 1.25 | .0125*2000=$25 |
| 2nd quarter | 2025 | 1.25 | 25.31 |
| 3rd Q | 2050.31 | 1.25 | 25.63 |
| 4th Q | 2075.94 | 1.25 | 25.95 |
total interest earned in 1 year is $101.89
As an anual interest rate that would be 101.89/2000=.50945 or 5.09%
APY is 5.09%
3. If buy a bond with a par value of $1000, and a with a 6% coupon rate but you pay $1050 for the bond (even though its face value is $1000), what is the Current Yield on your investment?
The amount of interest you get is 6% of $1000=$60
$60 is some percent of $1050
60/1050=.0571...
Curent Yield is 5.71%
4. If buy a bond with a par value of $2000, and a with a 5% coupon rate but you pay $1980 for the bond (even though its face value is $2000), what is the Current Yield on your investment?
The amount of interest you get is 5% of $2000 = .05*2000 = $100
$100 is some percent of $1980
100/1980=.0505...
Current Yield is 5.05%