Question

A bank quotes an interest rate of 5.5% per annum with quarterly (four times a year) compounding. What is the equivalent rate with (a) continuous compounding and (b) semi annual compounding

Answer 1

continuous compounding rate = 5.61 %

semi annual compounding rate = 5.34 %

Step-by-step explanation:

The effective interest rate is also known as the continuous compounding rate. This is the interest amount that if compounded once a year, would give us the same results as interest per period compounded a number of times a year.

continuous compounding rate :

5.5% Shift NOM %

4 P/YR

SHIFT EFF % = 5.61 %

semi annual compounding :

SHIFT EFF % = 5.61 %

2 P/YR

SHIFT NOM % = 5.34 %