Question

1. A bank offers 6.00% on savings accounts. What is the effective annual rate if interest is compounded daily?

Answer Format: Percentage Round to: 4 decimal places (Example: 9.2434%

2. A bank offers 9.00% on savings accounts. What is the effective annual rate if interest is compounded continuously?

Answer Format: Percentage Round to: 4 decimal places

Answer 1

1)

effective annual rate = (1 + APR/n)ⁿ - 1

effective annual rate = (1 + 0.06/365)³⁶⁵ - 1

effective annual rate = (1 + 0.000164)³⁶⁵ - 1

effective annual rate = 1.0618 - 1

effective annual rate = 0.0618 or 6.18%

2)

The continuous rate is calculated by raising the number "e" (approximately equal to 2.71828) to the power of the interest rate and subtracting one.

effective annual rate = 2.71828^0.09 - 1

effective annual rate = 1.0942 - 1

effective annual rate = 0.0942 or 9.42%