The return on a bond over six months is 7%. Find the implied continuous compounding rate.
Question 2.36: The return on a bond over six months is 7%. Find the implied...
The initial price of a six-month unit bond is e^{−0.5r}, where r denotes the implied continuous rate. If the bond is to produce a 7% return over six months, then
\frac{1-e^{-0.5r}}{e^{-0.5r}}=0.07,
which gives r ≅ 0.1353, or 13.53%.
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