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UNIT 3: TIME VALUE OF MONEY

TIME VALUE OF MONEY 3-15

Figure 3.3: Continuous Compounding: $100 at 25% for 3 Years

In the first two graphs, the interest is calculated and added to the
account at discrete periods at the end of each year (Figure 3.1) and
after each six-month period (Figure 3.2). Notice in Figure 3.3 that
when interest is calculated and added to the account continuously,
the graph is a smooth curve.

We can summarize the results as follows:

$100 at 25% for three years

Annual compounding:

195.31

Semi-annual:

202.73

Continuous:

211.70

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