ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Calculating the limit of this formula as n approaches infinity (per the definition of continuous compounding) results in the formula for continuously compounded interest: FV = PV x e (i x t), where e is the mathematical constant approximated as 2.7183.

Detailed explanation-2: -One example of continuous compounding in action is an account that earns interest at a rate of 14% per year, compounded monthly. The balance continually earns interest, which is added to the balance, and because there are 12 months in a year, the account balance increases by 1.17% each month.

Detailed explanation-3: -The compound interest formula is, A = P (1 + r/n)nt. Here, n = the number of terms the initial amount (P) is compounding in the time t and A is the final amount (or) future value. For the continuous compound interest, n → ∞.

Detailed explanation-4: -If the interest is compounded monthly, n is 12. This is used for interest which is compounded continuously.