The effective annual rate if interest is compounded continuously equals to 10.52%.
What is an effective annual rate?
This interest rate refers to the return on an investment or the rate owed in interest on a loan when the compounding periods is taken into account. The effective annual rate is equal to the nominal rate only if the compounding is done annually. So, when the number of compounding periods increase, the effective annual rate increases.
As we are looking for continuous compounding formula, the effective annual rate is as follows:
EAR = e^i – 1
Given data
A bank offers 10.00% on savings accounts.
EAR = e^(0.10) - 1
EAR = 1.10517091808 - 1
EAR = 0.10517091808
EAR = 10.52%
Therefore, the effective annual rate if interest is compounded continuously equals to 10.52%.
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