An investment is made in an account that pays 6.25%, compounded continuously. What is the effective yield for this investment? Round your answer to two decimal places.
A)6.25%
B)6.40%
C)6.94%
D)6.45%
E)6.35%

Question

Quizplus · Accepted Answer

The formula for continuous compounding is A=Pe^(rt), where A is the amount, P is the principal (initial amount), e is the constant 2.71828..., r is the annual interest rate expressed as a decimal, and t is the time in years. In this case, r = 0.0625 and t = 1. So, A = Pe^(0.0625*1) = Pe^0.0625. The effective yield is then (A-P)/P = e^(0.0625)-1 = 0.0645, or 6.45% rounded to two decimal places. Therefore, the best choice is D.

An Investment Is Made in an Account That Pays 6