Find the effective annual yield

Question

A paperbook savings account has a rate of 6%. Find the effective annual yield , rounded to the nearest tenth of a percent, if the interest is compounded 1000 times per year.

Answer 1

This problem is quite unrealistic due to compounding one thousand times per year--awkward, not daily, but about 3.65 times per day.  Perhaps the bank is open 24 hours per day and a guy in a green eyeshade comes in to calculate the current balance on this funky schedule.

 

This could be closely approximated by assuming continuous compounding. e^0.06 = 1.061836547;

this corresponds to 6.18 % annual yield.