2.5. Continuously Compounding Interest Flashcards
Continuously compounded formula…
Future value: present value * e^r*n.
Present value: future value / e^r*n.
When interest is paid more frequently…
principal * (1+ interest rate / number of payments in the year)^years * number of payments in a year.
Royal Bank of Scotland currently offer their Digital Regular Saver account that pays 6.00% (6.17% AER) paid monthly.
How much will £5,000 in that account be worth in one year…
5,000(1+0.0617/12)^112
= £5,317.38
Trading212 continuously compound the interest earned, paying daily.
A £1,000 cash holding in their Invest account, earning 2.15% interest would be worth £x in 8 year…
£1,000e^0.02158
= £1,187.68
A bank will pay you £85,000 in ten years time for savings deposits you have made today.
The interest is continuously compounded at 6.75%.
What is the value today…
£85,000/e^0.0675*10
= £43,278.30
