RatedrillEffective rate from continuous compounding
A time value of money problem from Ratedrill. Solve it with one answer box, with fresh numbers on every attempt and the formula, calculator keystrokes and Excel version in the worked answer, and it is checked the moment you submit.
The task
An account pays 2% per year, compounded continuously. What is the effective annual rate?
What this problem teaches
The formula: EAR = e^r - 1. Monthly compounding of the same rate gives 2.0184%; continuous compounding is the upper limit as the periods get shorter.
A hint if you get stuck
With continuous compounding, one dollar grows to e^r in a year, so EAR = e^r - 1.
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