12 Pages Posted: 29 Mar 2014
Date Written: March 27, 2014
The mathematics of continuous compounding is not limited to the valuation of continuously compounded financial instruments and flow annuities, but rather it is a versatile and robust model that may be used for valuation of all financial contracts normally encountered. It consists of a simple, consistent, coherent and conceptually appealing set of equations that apply without modification to the complete range of applications. The discrete stepwise model of compounding, by contrast, is a redundant innovation that is more complicated than the generalized model and limited in scope.
Keywords: valuation, continuous compounding, time value of money, discounted cash flow, exponential growth
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