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, ei = 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%.
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. |