Lusztig, Cleary & Schwab

Finance in a Canadian Setting, 6th edition

Chapter 5, page 183
John Wiley & Sons Canada, Ltd., 2001

CONTINUOUS COMPOUNDING

Q.9 (a) If a bank pays 6 percent interest compounded annually on a $1,000

deposit, what will be the value of this deposit at the end of 10 years?
(b) If another bank pays 6 percent interest on the same $1,000 deposit but
compounds interest quarterly, what will be the value of this deposit at the
end of 10 years? What is the effective annual interest rate being paid?
(c) If interest were paid continuously at 6 percent on this $1,000 deposit, what
would it be worth in 10 years?

Q.io a) Bank A offers an 8 percent nominal interest rate compounded monthly on

its savings deposits. Bank B also offers an 8 percent nominal interest rate
but compounds continuously. Compare the two alternatives on the basis
of (a) the future value of $5,000 in five years and (b) the effective annual
interest rate. Is continuous compounding a significant advantage over the
more typical monthly compounding?

r A rß
0
c uw/eß i a
p
Lusztig, Cleary & Schwab
Finance in a Canadian Setting, 6 edition
Chapter 5, page 183
John Wiley & Sons Canada, Ltd., 2001

CONTINUOUS COMPOUNDING
fto» w#"10
Q-9 (a) If a bank pays 6 percent interest compounded annually on a $1,000 q Qcf
deposit, what will be the value of this deposit at the end of 10 years?
(b) If another bank pays 6 percent interest on the same $1,000 deposit but (o^O fr Y) Y-/
, - / 17 ¿¿^compounds interest quarterly, what will be the value of this deposit at the J

end of 10 years? What is the effective annual interest rate being paid? -
'Wfjöz
/$ƒ /$ 2
(c) If interest were paid continuously at 6 percent on this $1,000 deposit, what___________ —
would it be worth in 10 years? ~

Q.10 Bank A offers an 8 percent nominal interest rate compounded monthly on

its savings deposits. Bank B also offers an 8 percent nominal interest rate
but compounds continuously. Compare the two alternatives on the basis
of (a) the future value of $5,000 in five years and (b) the effective annual
interest rate. Is continuous compounding a significant advantage over the
more typical monthly compounding? f

'¿tep s. 7^4 n-