CONTINUOUS COMPOUNDING

WEB APPENDIXAND
5A DISCOUNTING

(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)

Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: Problems
(5A) FV, continuous compounding
1

Answer: b

EASY/MEDIUM

$55,361.08
$58,274.83
$61,188.57
$64,247.99
$67,460.39

(5A) FV, continuous compounding

.

C J

In six years' time, you are scheduled to receive money from a trust
established by your grandparents. When the trust matures there will be
$100,000 in the account. If the account earns 9% compounded
continuously, how much is in the account today?
a.
b.
c.
d.
e.

EASY/MEDIUM

$38,735.52
$40,774.23
$42,812.94
$44,953.59
$47,201.27

(5A) PV, continuous discounting

.

Answer: b

If you receive $15,000 today and can invest it at a 5% annual rate

compounded continuously, what will be your ending value after 20 years?
a.
b.
c.
d.
e.

C J

C J

Answer: a

MEDIUM

Assume one bank offers you a nominal annual interest rate of 6%

compounded daily while another bank offers you continuous compounding at
a 5.9% nominal annual rate. You decide to deposit $1,000 with each
bank. Exactly two years later you withdraw your funds from both banks.
What is the difference in your withdrawal amounts between the two banks?
a.
b.
c.
d.
e.

$2.24
$2.35
$2.47
$2.59
$2.72

Web App. 5A: Continuous Compounding M/C Problems

Page 5A-1

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

(5A) PV, continuous discounting

4

C J

$1,900
$2,000
$2,100
$2,205
$2,315

(5A) PV, continuous discounting

.

C J

C J

Answer: d

MEDIUM/HARD

$ 835.94
$ 879.93
$ 926.24
$ 974.99
$1,023.74

(5A) Cont. compounding & nom. rate

.

MEDIUM/HARD

You place $1,000 in an account that pays 7% interest compounded

continuously. You plan to hold the account exactly 3 years.
Simultaneously, in another account you deposit money that earns 8%
compounded semiannually. If the accounts are to have the same amount at
the end of the 3 years, how much of an initial deposit do you need to
make now in the account that pays 8% interest compounded semiannually?
a.
b.
c.
d.
e.

Answer: a

7.61%
7.99%
8.39%
8.81%
9.25%

(5A) Cont. & semiann. comp.

.

C J

You need a down payment of $19,000 in order to purchase your first home
4 years from today. You currently have $14,014 to invest. In order to
achieve your goal, what nominal interest rate, compounded continuously,
must you earn on this investment?
a.
b.
c.
d.
e.

MEDIUM

$349.49
$367.88
$386.27
$405.59
$425.87

(5A) Continuous compounded int. rate

.

Answer: b

How much should you be willing to pay for an account today that will
have a value of $1,000 in 10 years under continuous compounding if the
nominal rate is 10%?
a.
b.
c.
d.
e.

MEDIUM

You have $5,436.60 in an account that pays 10% interest, compounded

continuously. If you deposited some funds 10 years ago, how much was
your original deposit?
a.
b.
c.
d.
e.

Answer: b

C J

Answer: d

MEDIUM/HARD

For a 10-year deposit, what annual rate payable semiannually will

produce the same effective rate as 4% compounded continuously?
a. 3.46%
b. 3.65%

Page 5A-2

M/C Problems Web App. 5A: Continuous Compounding

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

c. 3.84%
d. 4.04%
e. 4.24%

Web App. 5A: Continuous Compounding M/C Problems

Page 5A-3

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ANSWERS
AND SOLUTIONS
WEB APPENDIX
5A

Page 5A-4

Answers

Web App. 5A: Continuous Compounding

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

1.

(5A) FV, continuous compounding

N
PV =
i
iN

C J

Answer: b

EASY/MEDIUM

C J

Answer: b

EASY/MEDIUM

20
$15,000.00
5.00%
1.0000

FV = PV(ein)
FV = $40,774.23
2.

(5A) PV, continuous discounting

N
FV
i
iN

6
$100,000
9.00%
0.5400

PV = FV/(ein)
PV = $58,274.83
3.

(5A) FV, continuous compounding

N
PV
INOM
M
iContinuous
iContinuous N

C J

Answer: a

MEDIUM

C J

Answer: b

MEDIUM

C J

Answer: b

MEDIUM

2
$1,000
6.00%
365
5.90%
0.1180

Daily compounding:
FV = PV (1 + INOM/M)MN
FVDaily = $1,127.486
Continuous compounding:
FV = PV (ein)
FVContinuous = $1,125.244
Difference = $2.24
4.

(5A) PV, continuous discounting

N
FV
i
iN

10
$5,436.60
10.00%
1.0000

PV = FV/(ein)
PV = $2,000.01
5.

(5A) PV, continuous discounting

N
FV
i
iN

10
$1,000.00
10.00%
1.0000

PV = FV/(ein)
PV = $367.88
6.

(5A) Continuous compounded int. rate C J

Answer: a

MEDIUM/HARD

N
PV
FV
FV
ein
4i ln e
4i
i
7.

4
$14,014
$19,000
= PV (ein)
= 1.35579
= ln 1.35579
= 0.3044
= 7.61%

(5A) Cont. & semiann. comp.

N
PV
INOM
M
iContinuous
iContinuous N

C J

Answer: d

MEDIUM/HARD

C J

Answer: d

MEDIUM/HARD

3
$1,000
8.00%
2
7.00%
0.2100

Continuous compounding:
FV = PV (ein)
FVContinuous = $1,233.68
Now, calculate the initial deposit:
N
6
I/YR
4.00%
PMT
0
FV
$1,233.68
PV
$974.99
8.

(5A) Cont. compounding & nom. rate

N
M
iContinuous
iContinuous N

10
2
4.00%
0.4000

Continuous compounding:
ein = (1 + INOM/M)NM
0.4000
e
= (1 + INOM/2)20
0.0200
e
= 1 + INOM/2
1.0202013 = 1 + INOM/2
0.0202013 = INOM/2
INOM = 4.04%