8006 Exam Dumps | When comparing compound interest rates to equivalent continuously compounded rates of return, the latter

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
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Question 80/101

When comparing compound interest rates to equivalent continuously compounded rates of return, the latter will always be:

A. lower

B. higher

C. the same

D. cannot say with available information

Correct Answer: A

Explanation
As the compounding frequency increases, the nominal rate needs to decrease to produce the same amount of dollars at the end of a given time period. A continuously compounded rate of return has an infinite number of discrete compounding periods, and therefore the nominal rate expressed as a continuously compounded rate will always be nominally lower than any other rate.
Refer to the tutorial on interest rates for more details on continuously compounded rates work.

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