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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

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Zviko

Answer:

continuous compounding rate  = 5.61 %

semi annual compounding rate =  5.34 %

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 %

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