Continuous compounding

The process of accumulating the time value of money forward in time on a continuous, or instantaneous, basis. Interest is earned constantly, and at each instant, the interest that accrues immediately begins earning interest on itself.

Continuous Compounding

Describing interest that accumulates on a constant basis. That is, if a loan has continuous compounding interest, the interest accumulates all the time, which means that the interest added to the loan balance also begins earning interest on itself. In the short and medium term, this has almost the same yield as daily compounding interest but over the long term, the continuous compounding interest can earn much more. Albert Einstein was once reported as saying that there is no more powerful force in the universe than continuous compounding interest. See also: Compounding.

continuous compounding

Compounding of interest using the shortest possible interval of time. Although continuous compounding sounds impressive, in practice it results in virtually the same effective yield as daily compounding.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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