So, we learned that the more times we compound, the more money we make... What if we could compound continuously?
Let's figure out how the formula for this would work:
We'll invest $1.00 at 100% interest for one year and we'll keep increasing the compounding and see what happens.
A quick example, so you can follow this:
$1.00 compounded quarterly at
100% interest for 1 year...
initial amount = $1
split factor = 1.25
number of splits = 4
Do the same for compounded monthly.
Let's make a table:
Look at what's happening here.
Not changing very much anymore, are they?
In fact, they are getting closer and closer to a very special number
It's an irrational number like . It goes on forever and ever and never repeats.
We won't be able to use the split factor for continuous compounding, BUT we WILL be able to use this e guy... and he came from the split factor!
Continued on the next page