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What is Continuous Compounding?

April 26, 2017calculating interest Compound interest compounding Continuous interest rates

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What is Continuous Compounding?

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Understanding the potential advantages and disadvantages of continuous compounding is key for anyone who hopes to make smart financial decisions. Once you know how to calculate compound interest, you’ll be better able to avoid excess debt while investing your money in the best way possible. The term compound interest is used to describe an arrangement in which accumulated interest is added back to the principal to ensure additional interest is earned on the entire balance from that moment on. When interest is declared to be principal, this process is known as continuous compounding. In comparison to compound interest, simple interest is calculated based only on the principal of the investment or the portion of the loan amount which remains unpaid. However, continuous compounding is much more common than simple interest in the financial world today. The mathematical formula used for calculating compound interest is M = P(1 + i)n. M is the final amount with the principal, P is the princi