With continuous compounding
A) the effective rate is higher than the nominal rate
B) the effective rate is higher than the logarithmic rate
C) the base "e" is the effective rate
D) all the above are correct

Question

Quizplus · Accepted Answer

With continuous compounding, the effective annual rate is calculated using the formula A = Pe^(rt), where "e" is the base of natural logarithms (approximately equal to 2.71828). Since "e" is greater than 1, the effective rate is always higher than the nominal rate, which is based on simple interest. Also, the effective rate calculated with continuous compounding is the same as the logarithmic rate, which is a continuous function of time, but not necessarily the same as the periodic rate. So, choice A is the best answer.

With Continuous Compounding