Continuous compounding is the procedure of obtaining interest on top of interest in a monthly, quarterly and semiannual basis. It is utilized to discover the future value of a present sum when investment is exacerbated persistently.
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Formula from Continuous Compounding
FV = PV x ert
- FV = Future value
- PV = Present value
- r = Interest rate
- t = Number of years
Example from Continuous Compounding
An amount of $5000.00 is deposited in a bank paying an annual interest rate of 5%, compounded continuously. Find the future value after 3 years.
PV = 5000 r = 5% = 0.05 t = 3
Substitute the given values in the formula, FV = PV x ert = 5000 x e0.05 x 3 = 5000 x e0.15 = 5000 x 1.161834 = 5809.17