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Continuous Compounding

Published on 06/09/2008

Activity Overview

In this activity, students deal with financial computations, where the interest is compounded continuously. Depending on the length of each compounding period, students will determine the number of compounding periods.

Before the Activity

  • Select TVM Solver from the calculator menu
  • See the attached activity PDF file for detailed instructions for this activity
  • Print page 15-16 from the activity PDF file for your class
  • During the Activity

    Distribute the pages to the class.

    Follow the Activity procedures:

  • Enter the values for the total number of payments (N), annual interest rate ( I%), present value (PV), and number of payments per year (P/Y)
  • Enter a very large number (1x1011) for the number of compounding periods per year (C/Y)
  • Calculate the future value of an investment when the interest is compounded continuously
  • Compare the effective annual rates for interest compounded continuously and interest compounded quarterly
  • Calculate the nominal annual rate given the effective annual rate of interest compounded continuously
  • Calculate the future yield of a deposit that earns interest compounded daily
  • After the Activity

    Review student results:

  • As a class, discuss questions that appeared to be more challenging
  • Re-teach concepts as necessary