Question

1 IJA bank currently charges 10% interest compounded annually on business loans. If the bank were to charge continuous compounding, what would be the annual effective interest rate? a)10% b.) 10.517% c.) 12.5% d.) 12.649% e.) infinite

Answer 1

1) Solution:
From the given problem, r = 10 % n = infinity Then substitute in eq^n (1) R = lim_n rightarrow infinity ((1 + r/n)^n - 1) times 100 % R = (e^r - 1) times 100 % where, r = 10 % rightarrow R = (e^10/100 - 1) times 100 = (e^0.1 - 1) times 100 \r\n = (1.10517 - 1) times 100 AEIR = 10.517 % Therefore option (b) is correct answer for these problem
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