Hopefully you've read the other time value of money tutorials and feel pretty good about things. There is however one type of problem in which we won't use the calculator's function. It is the problem of continuous compounding. Whenever you see these two words, you're going to use the following formula:
This formula is very simple. FV is the future value that we will solve for. PV is the present value (usually the money we deposit today). The e that you see there is simply the "natural number." Don't worry about that part. It is just a key on the calculator that we'll use. N is just the number of years. I is the interest rate. The trick to the interest rate is to make sure you use the decimal form of the number. This will all come together when we check out the following sample problem.
Practice Problem 1: Let's Deposit Some Money
If we deposit $500 in an account paying 4% compounded continuously, how much money will be in our account at the end of 25 years?
Solution:
Pretty easy, huh? Let's put these numbers into our formula and solve for FV. You should get the following:
First, multiply 25 by 0.04. Then, hit the ex key on your calculator. Finally, multiply by 500. This should give you a value in this account of $1,359.14.
Practice Problem 2: Now it's your turn!
You place $15,000 into an account paying 6.5% compounded continuously. How much money will you have in the account after 10 years?
Solution:
You should have $28,733.11 as your answer. If you didn't get this value, make sure you're putting in your interest as a decimal, and that you're working from right-to-left.
As always, if you have any questions or comments, please ask them in the forum.