PRC-2 · Chapter 5 · Question 24 of 50
Which of the following compounding frequencies will yield the highest Effective Annual Rate (EAR) assuming the nominal stated interest rate remains identical?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Compounded Continuously
Explanation
As the frequency of compounding increases, the effect of 'interest on interest' magnifies. Therefore, continuous compounding (calculating interest at every smallest instance) provides the absolute highest effective yield.
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