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Basic Question 12 of 13
A money manager has $20 million to invest for one year. She has identified three alternative one-year certificates of deposit (CD) (shown below):
CD1 | Monthly | 7.82%
CD2 | Quarterly | 8.00%
CD3 | Continuously | 7.95%
B. CD 2
C. CD 3
CD | Compounding frequency | Annual interest rate
CD1 | Monthly | 7.82%
CD2 | Quarterly | 8.00%
CD3 | Continuously | 7.95%
Which CD has the highest effective annual rate (EAR)?
A. CD 1
B. CD 2
C. CD 3
User Contributed Comments 8
| User | Comment |
|---|---|
| fmjohnson7 | could some just explain how to get the continous EAR using the BAII calculator. |
| assiduous | 1) Enter nominal interest rate in decimal format 2) Hit 2nd 3) Hit LN (calculates e^x where x = nominal interest rate) |
| birdperson | for continuous EAR use the formula or the ICONV and then for C/Y enter a big number...that'll get you close enough |
| bmalbra | Hi Guys, Can someone please explain how to get CD3 with financial calculator HP12 C? Thank you |
| Huricane74 | There are two ways to get the answer to C. Method 1: a.) Take .0795 and divide by 365, which gives you 0.000217808 b.) Add 1 to 0.000217808, which give you 1.000217808 c.) Raise 1.000217808 to the 365 power, --> 1.00217808^365 This give you 1.082736187 which is rounded to 8.28% Method 2: a.) On BAII, type 0.0795 b.) Press [2ND] c.) Press e^x This gives you 1.08274556 Method two is more accurate, but method one is close enough if you are only concerned about two decimal points. |
| pratik2131 | to calculate continuous do = 7.95/100=0.0795, then 0.0795 press 2nd and then LN you will get 1.0827 then minus 1 =0.0827^100=8.2746. |
| adrianc827 | @fmjohnson7 honestly i just put 999,999,999 for C/Y and it gets me the correct answer |
| Micheal11 | @adrianc827 same here. I just put a massive number and works just fine. |
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Learning Outcome Statements
calculate and interpret annualized return measures and continuously compounded returns, and describe their appropriate uses
CFA® 2024 Level I Curriculum, Volume 1, Module 1.