# Continuous Compounding

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## Definition of 'Continuous Compounding'

Continuous compounding is a method of calculating interest in which the interest earned on an investment is added to the principal amount and then immediately reinvested. This means that the interest is earned on the interest, which results in a higher rate of return than simple interest.

The formula for continuous compounding is:

```
A = Pe^rt
```

where:

* A is the future value of the investment
* P is the principal amount
* e is the base of the natural logarithm (approximately 2.71828)
* r is the interest rate
* t is the number of years

For example, if you invest \$100 at an interest rate of 10% for 1 year, the future value of your investment using simple interest would be \$110. However, if you use continuous compounding, the future value of your investment would be \$110.51. This is because the interest earned on the interest in the first year is added to the principal amount, which means that the interest earned in the second year is calculated on a larger principal amount.

Continuous compounding can be a very powerful tool for investors, as it can help to grow their investments at a faster rate. However, it is important to note that continuous compounding is only effective over long periods of time. For shorter periods of time, the difference between simple interest and continuous compounding is not as significant.

Here are some additional examples of continuous compounding:

* If you invest \$100 at an interest rate of 5% for 10 years, the future value of your investment using simple interest would be \$162.89. However, if you use continuous compounding, the future value of your investment would be \$164.86.
* If you invest \$100 at an interest rate of 10% for 20 years, the future value of your investment using simple interest would be \$259.37. However, if you use continuous compounding, the future value of your investment would be \$271.26.
* If you invest \$100 at an interest rate of 15% for 30 years, the future value of your investment using simple interest would be \$412.16. However, if you use continuous compounding, the future value of your investment would be \$464.11.

As you can see, the difference between simple interest and continuous compounding can be significant over long periods of time. If you are planning to invest for a long period of time, it is worth considering using continuous compounding to maximize your returns.

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