CONTINUOUS COMPOUNDING

Question 1

If the number of
compounding periods per year becomes infinite

Answer 1

then interest is said to compound
continuously

Question 2

continuous compounding is

Answer 2

FVN = PV e^(rs*N)

Question 3

EAR

Answer 3

effective annual rate
(EAR).

Question 4

EAR

Answer 4

EAR = (1 + Periodic interest rate)^m – 1

Question 5

With continuous
compounding, we can solve for the effective annual rate as follows

Answer 5

EAR = e^ rs - 1