Simple interest A simple interest rate of r for T years means a 100 investment becomes 100(1 + rT) at maturity T. (In other words, there is no compounding.)
(a) For simple interest of 5% for ten years, calculate the equivalent interest rate with (i) annual, (ii) quarterly and (iii) continuous compounding. Assume 30/360 daycount.
(b) Show that if simple interest of r for T years is equivalent to r ∗ interest rate with annual compounding, then r∗ → 0 as T → ∞.