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Chapter 5: Q.38 (page 324)

What rate of interest compounded continuously will yield an effective interest rate of 6%?

Short Answer

Expert verified

The rate of interest that when compounded continuously will yield an effective interest rate of 6% is 5.827%

Step by step solution

01

Step 1. Given Information

Given to determine the rate of interest that when compounded continuously will yield an effective interest rate of 6%

02

Step 2. Calculation

The effective rate of interest re for an investment with rate of interest r and compounded continuously is given by re=er-1

Here the effective rate of interest is 6%, the decimal form is given by re=0.06

Plugging the values:

re=er-10.06=er-1er=0.06+1er=1.06r=ln1.06r=0.058268

03

Step 3. Conclusion

The rate of interest that when compounded continuously will yield an effective interest rate of 6% is 5.827%

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