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Question 164222: find the effective interest rate if the norminal interest rate is 10% compounded continousely for 2year: find the effective interest rate if the norminal interest rate is 10% compounded continousely for 2year
Answer by aka042(26) About Me  (Show Source):
You can put this solution on YOUR website!
Compounding interest follows this formula r effective = e^(r*t) - 1 where e is the mathematical constant approximately equal to 2.718..., t is the number of periods (years) and r is the nominal interest rate . Why this is requires some knowledge of calculus. However, calculating interest rates using the formula is simple!


For your problem, we simply plug in the values: r effective = e^(.1*2) - 1 = e^(.2) - 1 = .2214. Therefore, your effective interest rate is about 22.14%.