Whats the

At one time, commercial banks and savings and loan associations (S&Ls) were restricted in the interest rates they could offer on savings accounts. Under what was known as Regulation Q, S&Ls were allowed to pay at most 5.5 percent and banks were not allowed to pay more than 5.25 percent (the idea was to give the S&Ls a competitive advantage; it didn't work). The law did not say how often these rates could be compounded, however. Under Regulation Q, then, what were the maximum allowed interest rates?

The maximum allowed rates occurred with continuous, or instantaneous, compounding. For the commercial banks, 5.25 percent compounded continuously would be:

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

6. Discounted Cash Flow Valuation

© The McGraw-Hill Companies, 2002

CHAPTER 6 Discounted Cash Flow Valuation

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