Question

Explain in your own words what the term compound interest means. What does continuous compounding mean?

Short answer

Compounding annually means that interest is applied to the principal and previously accumulated interest annually; whereas, compounding continuously means that interest is applied to the principal and accumulated interest at every moment.

Step-by-step solution

Step 1. Given Information

We have to explain the meaning of compound interest means and continuous compounding mean.

Step 2. Meaning of Compound Interest 

Compound interest is interest on borrowed money - (or invested money) that is increased by interest calculated in the previous period (the period can be: daily, monthly, quarterly, semiannually or annually). Interest is not paid (or not earned) only on the borrowed (or the

invested) money but also on the previously calculated interest.

Step 2. Meaning of Continuous Compounding Mean 

Continuous compound interest is when interest is compounded at every time (continuously).