Definition of Continuous compounding:
Continuous compounding is the mathematical limit that compound interest can reach if it's calculated and reinvested into an account's balance over a theoretically infinite number of periods. While this is not possible in practice, the concept of continuously compounded interest is important in finance. It is an extreme case of compounding, as most interest is compounded on a monthly, quarterly, or semiannual basis.
Instead of calculating interest on a finite number of periods, such as yearly or monthly, continuous compounding calculates interest assuming constant compounding over an infinite number of periods. The formula for compound interest over finite periods of time takes into account four variables:.
Interest compounding method in which interest is added daily (and not at the end of a month) to the accrued amount.
How to use Continuous compounding in a sentence?
- Most interest is compounded on a semiannually, quarterly, or monthly basis.
- The formula to compute continuously compounded interest takes into account four variables.
- Continuously compounded interest assumes interest is compounded and added back into the balance an infinite number of times.
- The concept of continuously compounded interest is important in finance even though it’s not possible in practice.
Meaning of Continuous compounding & Continuous compounding Definition