Interest

and Money‐Time Relationships

Continuous Compounding Interest

F = Pert

where: ert is continuous compounded amount factor

r = nominal rate of interest
t = number of years

Effective rate if compounded continuously, ER:

ER = er ‐ 1
Continuous Compounding Interest

Example 1:
P100,000 is deposited in a bank that earns 5% compounded
continuously. What will be the amount after 10 years?
Interest and Money‐Time Relationships
Continuous Compounding Interest

Example 2:
Money is deposited in a certain account for which interest is
compounded continuously. If the balance doubles in 6 years,
what is the annual percentage rate?
Ans. 11.55%
Continuous Compounding Interest

Example 2:
A man wishes to have P 40,000 in a certain fund at the end of
8 years. How much should he invest in a fund that will pay 6%
compounded continuously?

Ans. P 24, 751.34

Continuous Compounding Interest

Example 3:
If the effective annual interest rate is 4%, compute the
equivalent nominal interest compounded continuously.

Ans. 3.92%
Continuous Compounding Interest

Example 4:
What is the nominal rate of interest compounded continuously for
10 years if the compound amount factor is 1.34986?

Ans. 3%