If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to?
A) 1/ln1.065
B) 6.10%
C) ln1.065
D) 6.24%
E) e¹.⁰⁶⁵ − 1

Question

Quizplus · Accepted Answer

To convert an annual interest rate compounded annually to a continuously compounded rate, we use the formula:

r_cont = ln(1 + r_annual)

where r_cont is the continuously compounded rate and r_annual is the annual compounded rate.

Substituting the given values, we get:

r_cont = ln(1 + 0.065) 
r_cont ≈ 0.062 ≈ 6.24%

Therefore, the answer is option C, ln1.065.

If the Risk-Free Rate Is 6