SOLUTION: What does it mean for interest to be compounded continuously as opposed to weekly, monthly or annually?

Question 157377: What does it mean for interest to be compounded continuously as opposed to weekly, monthly or annually?
Answer by gonzo(654) (Show Source): You can put this solution on YOUR website!
you can go to yahoo or google and search on "continuous compounding" and get many answers.
here is the url to one of them.
http://www.frickcpa.com/tvom/TVOM_Continuous.asp
continuous compounding is an infinitely small interval of time taken an infinitely large number of times per year.
example:
annually = 1 interval per year.
monthly = 12 intervals per year.
daily = 365 intervals per year.
hourly = 365*24 intervals per year.
every minute = 365*24*60 intervals per year.
every second is 365*24*60*60 intervals per year.
every time you multiply the interval, you divide the interest rate.
so annually = annual interest rate divided by 1.
monthly = annual interest rate divided by 12.
daily = annual interest rate divided by 365.
.......
every second is annual interest rate divided by (365*24*60*60).
as the number of periods per year approaches infinity, the interest rate approaches 0 for each period.
there are formulas to derive that and they are used to get an effective annual rate assuming continuous compounding.

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