3. Excel For Finance Tips - Continuous Compounding
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.
Training Video on Continuous Compounding in Excel: