First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate?
A) 9.97%
B) 16.76%
C) 9.66%
D) 22.06%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) with continuous compounding is calculated using the formula EAR = e^r - 1, where r is the nominal interest rate and e is the base of the natural logarithm (approximately 2.71828). Plugging in the given nominal rate of 9.5% (or 0.095 as a decimal), we get EAR = e^0.095 - 1 ≈ 0.0997 or 9.97%.

First Texas National Bank Is Offering a One-Year CD with a Nominal