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CS Executive · Corporate Accounting and Financial Management · Time Value of Money

Which statement about the Rule of 72 and the Rule of 69 as used in time value of money is correct?

The Rule of 69 is more accurate for continuous compounding, whereas the Rule of 72 is a handy approximation for annual compounding at moderate rates. Both estimate doubling time, neither is exact at all rates, and both relate to compound rather than simple interest.

  1. AThe Rule of 72 gives the exact doubling period at every interest rate
  2. BThe Rule of 69 is more accurate for continuous compounding, while the Rule of 72 is a convenient approximation for annual compounding at moderate ratesCorrect
  3. CThe Rule of 72 applies only to simple interest
  4. DBoth rules estimate the time to triple an investment

Explanation

The constant 69 (more precisely 69.3, from ln 2) suits continuous compounding, while 72 has many divisors and approximates annual compounding well at about 6-10%. Both are approximations and both concern doubling, and neither applies to simple interest, where doubling at rate r takes 100/r years.

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