Exponential functions are used to calculate continuously compounding interest rates.
For example, pretend a bank is offering 12% interest, compounding annually.
You would make 12% that year.
If it is compounding monthly, you'd make effectively 1.01^12 = 12.68%
If it is compounding daily, you'd make effectively 1.000328^365 = 12.747%
If you've had calculus, you know about infinite series. If you break the compounding periods down into infinity, to where it is "continuously compounding", it converges to e^r*t. So in our above example, e^.12 = 12.7497%.
This concept is used in a lot of financial markets for asset pricing, etc.
e is also used a lot in statistics.
2007-09-04
02:42:22
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