Lusctig, Cleary & Schwab Finance in a Canadian Setting, 6" edition Chapter 5, page 183 John Wiley & Sons Canada, Ltd., 2001 CONTINUOUS COMPOUNDING Q9@) o) © Qu0 2) ky Ifa 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? ‘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? If interest were paid continuously at 6 percent on this $1,000 deposit, what ‘would it be worth in 10 years? 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? for BonK AB calen late LHe prone of Sun i para)