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**CFA Practice Question**

An investment advertises its continuously compounded rate to be 11.63% on an annual basis. If the same were compounded quarterly what would be the equivalent rate?

A. 11.46%

B. 12.15%

C. 11.16%

**Explanation:**Assume that i is the annual rate embedded in continuous compounding. Based on continuous compounding, this is expressed as, e

^{i}= 1.1163. To calculate i, we take the natural log on both sides and get i = ln(1.1163) = 0.11, or 11%. If this rate is compounded quarterly, we get (1 + 0.11/4)

^{4}- 1 = 0.1146, or 11.46%.

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**User Contributed Comments**
2

User |
Comment |
---|---|

gazman1984 |
Good question! |

GBolt93 |
Or if you forget how to do continuous just plug in a large number. N=1000, PV=1, PMT=0, FV=1.1163 gets you i=11.0026% which is plenty close to solve for the quarterly EAY. |