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FRM Part I · FRM Exam Part I · Properties of Interest Rates

An interest rate is quoted as 6% per annum with annual compounding. What is the equivalent continuously compounded rate?

The equivalent continuously compounded rate is about 5.82%. It is found by taking the natural log of 1.06, which equals 0.0583. Continuous compounding grows money faster per nominal unit, so a lower rate matches the 6% annually compounded return.

  1. A5.82%Correct
  2. B5.94%
  3. C6.00%
  4. D6.18%

Explanation

Rc = ln(1.06) = 0.05827, or about 5.82%. The continuous rate must be lower than the annually compounded rate to produce the same growth. 6.18% reverses the conversion (e^0.06 - 1).

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