CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
A stated annual rate of 5% is compounded continuously. The effective annual rate is closest to:
The effective annual rate is about 5.13%, closest to 5.12%. With continuous compounding, EAR equals e raised to the stated rate minus one, so e^0.05 minus 1 gives roughly 5.13%, slightly above the 5% stated rate.
- A5.00%
- B5.12%Correct
- C5.25%
Explanation
With continuous compounding EAR = e^0.05 - 1 = 1.051271 - 1 = 5.13%, closest to 5.12%. The 5.00% option ignores compounding and 5.25% overstates it.
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