Arithmetic Ability
Compound Interest

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Q.

Find the effective rate of interest for an investment that earns 5 1/2% per year, compounded continuously

View Answer

Correct choice: A

Explanation:

We are not given a value of P in this problem, so either pick a value for P and stick with that throughout the problem, or just let P = P. We have that t = 1, and r = .055. To find the effective rate of interest, first find out how much money we have after one year: A = Pert A = Pe(.055)(1) A = 1.056541P. Therefore, after 1 year, whatever the principal was, we now have 1.056541P. Next, find out how much interest was earned, I, by subtracting the initial amount of money from the final amount: I = A − P = 1.056541P − P = .056541P. Finally, to find the effective rate of interest, use the simple interest formula, I = Prt. So, I = Pr(1) = .056541P .056541 = r. Therefore, the effective rate of interest is 5.65%
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