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Basic Question 0 of 10
The new products officer for the Strong-n-Safe Bank is trying to determine the stated rate for a new 4 year CD. The effective rate will be 6.95% and the CD will offer continuous compounding. The advertised stated rate would be closest to ______.
B. 6.82%
C. 7.20%
A. 6.72%
B. 6.82%
C. 7.20%
User Contributed Comments 35
| User | Comment |
|---|---|
| tawi | How did they get that? |
| tawi | Ok I got it ! The formula for Eff. Ann. Rate is EAR= e^r -1 |
| brimann | Using the interest conversion capabilities of the BAII+ I used the continuous compounding fuction on 12 which = 162,754 and plugged that in for C/Y, EFF = 6.95 then CPT NOM = 6.7191 |
| KD101 | Brimann's idea is good. Here are the step by step Hit 2nd - [ICONV] See NOM - Hit Down Arrow See EFF - Hit 6.95 See C/Y - Hit 12 then 2nd[e^X] and hit ENTER Now Down Arrow Key Now when you see NOM - Hit CPT You get 6.7191 |
| gruszewski | By the way KD101, C/Y can be any large number, why making it more difficult than it is with this e^X :-) |
| gruszewski | the fastest way is ln(1.0695) |
| Hamma | Thus is this the formula then? EAR(continuous compounding)= e^r - 1 0.0695 = e^r - 1 ln(1.0695)=r |
| debby2 | stated interest rate = ln (1+EAR) |
| Will1868 | debby2 is smart |
| MARINGI | gruszewski. thats pretty fast |
| Win1977 | Still confused on this one, could someone explain it based on using the BAII calc? Thanks. |
| 0is4eva | Recall that: FV(N) = PV * (1 + EAR)^N = PV * e^(r * N) r is the stated annual rate, EAR = effective annual rate. Abbreviate formula, recall that N=1, and solve for r: (1 + EAR) = e^(r) ln(1 + EAR) = ln( e^(r) ) ln(1 + EAR) = r ln(1.0695) = r r = 0.06719 = 6.72% |
| Cooltallgal | What C/Y is 12? The question only mentioned 4 years compound, but didn't say its compounding monthly... |
| faya | e^r-1 results in compounded return = 0.0695 To 'un-compound', take logs - ie. ln(1+r) = ln(1.0695) = 0.06719 as Ois4eva says. |
| gizi | Using BA11 Plus: 2nd ICONV 2nd CLR WORK EFF = 6.95 C/Y = 365 (365 dys in yr) CPT NOM = 6.719 |
| Kofo | pls: can someone say how to do this using the HP12C |
| AndressaS | Here you go using HP12C: 6.95 ENTER 100 % 1 + g LN Total: 0.06719 x 100 = 6.72% |
| StanleyMo | it has mentioned continuous compounding, so the formula use would be EAR = E^Rs-1 |
| kamil1 | in HP (1+0.0695)ln Than just multiply by 100 to get rid of the rounding |
| ravdo | When I do it exactly the way suggested by AndressaS and kamil1, my answer turns out to be 2.07. What am I doing wrong? Please take it step by step with the HP12C calc |
| TammTamm | Thanks debby2, the way you explained this appears to be the easiest way to remember it. |
| JKiro | note debby2 "formula" is for continous compounding |
| gazelle | ravdo, If you are using the ALG Mode,try those following steps: 6.95[%] +1[ENTER] [G][LN] = 0.6719 X 100= 6.72% |
| mwali | Hi Gizi: your method is straight forward. Thanx |
| SANTOSHPRABHU | STATED INTEREST RATE = ln (1 + EAR) = ln (1+0.0695)= 0.0671912 X 100 = 6.72% (4 year CD is an additional information and will not effect in our calculation of Stated Int Rate) |
| pokigbo | HP 12c Platinum 1 ENTER 0.0695 [+] [g][LN] 0.067191 100 [x] 6.72 |
| hussein1978 | what is cd |
| vatsal92 | Corporate Deposits |
| deliawmx | CD means certificate of deposit. |
| Yrazzaq88 | Use this in your texas instruments ICONV Effective interest = 6.95% C/Y = 48 (4 years) Nom = CPT =6.72 |
| Chl4072 | 1.0695 [LN] Finally get the answer!!! |
| marianne19 | see irazaaq for computation 4 years to 12 months = 48 months |
| nohuchi | EAR(continuous compounding)= e^r - 1 2nd ICONV 2nd CLR WORK EFF = 6.95 C/Y = 365 (365 dys in yr) CPT NOM = 6.719 |
| abs013 | There's too many different ways in the comment section. 2nd ICONV 2nd CLR WORK EFF = 6.95 C/Y = 12*4 = 48 CMPT NOM = 6.72 |
| anthealing | [2nd][ICONV] [2nd][CLR WORK] [EFF]=6.95 [C/Y]=1,000,000,000 (means e) ]NOM][CPT]=6.719 |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding;
CFA® 2024 Level I Curriculum, Volume 1, Module 1.