How does continuous compounding affect interest calculations?

Continuous compounding is an extreme case where the compounding period approaches infinitely small time intervals. This results in the highest possible interest accrual compared to annual, semi-annual or other periodic compounding frequencies. The formula for continuous compounding is: FV = PV * e^(rt), where e is the mathematical constant (approx 2.71828), r is the annual interest rate, and t is the time period in years. Due to the exponential nature, continuous compounding produces higher returns than periodic compounding over longer time periods.