Why option is higher ? .. compounded rate is always lower than effective
Share
Sign Up to SSEI Q Forum to ask questions
Login to SSEI Q Forum
Lost your password? Please enter your email address. You will receive a link and will create a new password via email.
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
The confusion comes from how interest rates are calculated and presented. Here’s a simpler explanation:
Effective Annual Rate (EAR): This is the interest rate you actually earn or pay after accounting for compounding over the year.
Continuously Compounded Rate: This assumes interest is compounded continuously throughout the year.
When you convert the EAR to a continuously compounded rate, the formula used is:
Continuously Compounded Rate=ln(1+EAR)
For example, if the EAR is 5%, the continuously compounded rate is approximately 4.879%.
In simpler terms, the statement “the continuously compounded stated annual rate is higher than the effective annual rate” refers to the nominal rate (before accounting for the effects of continuous compounding) appearing higher when compared directly.
So, while the effective interest you earn might be lower, the stated rate before considering continuous compounding effects is higher. This explains why option B is correct.
Buy suppose if effective annual rate is 5 percent .. thn continuously SAR may be 4.5 percent .. how it is higher then ?
It’s possible the stated CCSAR of 4.5% is a typo and should be a higher value. Â There might be a different term being used instead of CCSAR. For example, a nominal interest rate (which doesn’t consider compounding) could be mistakenly presented as CCSAR.
Nominal interest rate is a risk adjusted rate .. how does it does not include compounding , from my opinion it can