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Lesson 1.8 Continuous Compounding

Continuous compounding refers to interest being compounded infinitely often over small time periods, such as daily or continuously. This means the principal earns interest constantly, and the interest also earns interest. The formula to calculate future value with continuous compounding is F=Pe^rt, where F is future value, P is principal, r is interest rate, and t is time. An example calculates that $2,000 invested at 4.5% compounded continuously for 7 years would be worth $2,740.52.

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34 views

Lesson 1.8 Continuous Compounding

Continuous compounding refers to interest being compounded infinitely often over small time periods, such as daily or continuously. This means the principal earns interest constantly, and the interest also earns interest. The formula to calculate future value with continuous compounding is F=Pe^rt, where F is future value, P is principal, r is interest rate, and t is time. An example calculates that $2,000 invested at 4.5% compounded continuously for 7 years would be worth $2,740.52.

Uploaded by

glenn cardona
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Continuous compounding

• interest that is computed and added to the balance of an

account every instant.

• Continuously compounded interest means that

your principal is constantly earning interest and the

interest keeps earning on the interest earned.


Continuous Compounding
Formula:
𝒓𝒕 −𝒓𝒕
𝑭 = 𝑷𝒆 𝑷 = 𝑭𝒆
Where: 𝑭 - Final Amount
𝑷 - Principal
𝒓 - rate
𝒕 - term of investment (years)
𝒆 - constant (approximately 2.71828)
1. If interest is compounded continuously at
4.5% for 7 years, how much will a $2,000
investment be worth at the end of 7 years?

𝑭 = 𝑷𝒆𝒓𝒕
𝟎.𝟎𝟒𝟓𝒙𝟕
𝑭 = $𝟐𝟎𝟎𝟎𝒆

𝑭 = $𝟐, 𝟕𝟒𝟎. 𝟓𝟐
4. At what interest rate compounded
continuously would $3,000 grow to
$300,000 in 25 years?

𝑭 = 𝑷𝒆𝒓𝒕
𝟐𝟓𝒓
$300,000= $𝟑, 𝟎𝟎𝟎𝒆
r = 18.42%
𝑭 = 𝑷𝒆𝒓𝒕
𝐹
= 𝑒 𝑟𝑡
𝑃
𝐹
𝑙𝑛 = 𝑟𝑡
𝑃
𝐹
𝑙𝑛
𝑟= 𝑃 𝑥100
𝑡
3. How much would you have to invest in an account
earning 8% interest compounded continuously for it
to be worth one million dollars in 30 years?

𝒓𝒕
𝑭 = 𝑷𝒆

𝟎.𝟎𝟖𝒙𝟑𝟎
$𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 = 𝑷𝒆
P =$90,717.95
How long will it take P 4,000 to triple if
it is invested at 5% compounded
continuously?

𝒓𝒕
𝑭 = 𝑷𝒆
𝟎.𝟎𝟓𝒕
𝟑𝑷 = 𝑷𝒆
𝟎.𝟎𝟓𝒕
𝟑𝑷 = 𝑷𝒆
t =21.97 tears
𝒓𝒕
𝑭 = 𝑷𝒆
𝐹
= 𝑒 𝑟𝑡
𝑃
𝐹
𝑙𝑛 = 𝑟𝑡
𝑃
𝐹
𝑙𝑛
𝑡= 𝑃
𝑟
An amount of $2,340.00 is deposited
in a bank paying an annual interest
rate of 3.1%, compounded
continuously. Find the balance after
3 years.
If you invest $1,000 at an annual
interest rate of 5% compounded
continuously, calculate the final amount
you will have in the account after five
years.

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