3. Excel For Finance Tips - Continuous Compounding

Nick's picture

So we looked at interest compounding and we found that even though the quarterly compounded rate was lower, the fact that it was compounded 4 times a year meant that the annual rate ended up higher.

What happens if the rate is continuously compounded ?

What is the equivalent annual rate to a continuously compounded rate ?

Here's what it looks like in Excel:


So we can see that the difference between an annual rate and a continuously compounded rate is about 0.18% with rates at 6% I have slightly cheated here as I haven't actually used Continuous compounding... I have put the number of times compounded per year to a very large number (10,000). We will see later that there are useful mathematical implications of this equation.

Download my spreadsheet that allows you to enter values, calculates annual rates, and compares vs continuously compounded rates.


Training Video on Continuous Compounding in Excel: