But the interest rate wont be r because it has to be chopped into n periods like this. The continuous compounding formula can be found by first looking at the compound interest formula where n is the number of times compounded t is time and r is the rate. The formula for compound interest is P 1 rnnt where P is the initial principal balance r is the interest rate n is the number of times interest is compounded per time period and t is the number of time periods.
To calculate continuously compounded interest use the formula below.
This means that at the end of the first year youll receive 1 extra dollar. Lets first review how simple interest works. The continuous compounding formula determines the interest earned which is repeatedly compounded for an infinite time period. And n t is the total number of compounds.