Continuous Compound Interest

If an amount of moneyis invested so that compound interest is accrued at the rate r% per time period, then aftertime periods the amount of money will have grown to an amount

If however, the interest is compounded more regularly, then something a little bit strange happens. Suppose £1000 is invested at 12% per annum. If interested is compounded annually then at the end of a year, the original £1000 will have grown to £1120. If however, it is compounded monthly, then the monthly rate of interest will be 12/12 =1% and after 1 year the original £1000 will have grown to

In fact if the year is divided intotime periods, so that interest is compounded n times a year, the interest per time period isand the amount of money will have grown to

The table below shows the investment after 1 year for various values of n.

10

1126.691779

100

1127.415743

1000

1127.488731

10000

1127.495196

100000

1127.495975

Astends to infinity, this expression tends to a limit

We can generalise this reasoning, so that if annual interest ofis compounded continuously on an investment ofat the end of a year the investment will have grown to and at the end ofyears the principal will have grown to