Continuous compounding

Definition

Continuous compounding in plain English

Compounding means you earn returns on your returns, not just on your original money. Normally interest gets added at set moments — once a year, once a month — but "continuous" compounding imagines it being added constantly, every possible instant, with no gap. It's the theoretical limit: chop the year into more and more tiny slices and the growth settles on a clean formula, FV = PV · e^rt, where e ≈ 2.718. Think of it like a plant that grows a hair every second rather than in one daily jump — over a year the difference is small but real, and it's the mathematically "smoothest" way to grow money, which is why finance loves it.

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• Option
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Related Principles of Finance terms

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• Amortization
• Annuity
• Annuity due
• Arithmetic mean return
• At the money (ATM)
• Binomial model
• Call option
• Compounding
• Discounted cash flow (DCF)