
Section 9.2: Definition of e • 173
9.2 Definition of e
So far, we haven’t done any calculus involving exponentials or logs. Let’s start
doing some. We’ll begin with limits and then move on to derivatives. Along
the way, we need to introduce a new constant e, which is a special number in
the same sort of way that π is a special number—it just pops up when you
start exploring math deeply enough. One way of seeing where e comes from
involves a bit of a finance lesson.
9.2.1 A question about compound interest
A long time ago, a dude named Bernoulli answered a question about com-
pound interest. Here’s the setup for his question. Let’s suppose you have a
bank account at a bank that pays interest at a generous rate of 12% annu-
ally, compounded once a year. You put in an initial deposit; every year, your
fortune increases by 12%. This means that after n years, your fortune has
increased by a factor of (1 +0.12)
n
. In particular, after one year, your fortune
is just (1 + 0.12) = 1.12 times the original amount. If you started with $100,
you’d finish the year with $112.
Now suppose you find another bank that also offers an annual interest rate
of 12%, but now it compounds twice a year. Of course you aren’t going to get
12% for half a year; you have to divide that by 2. Basically this means that
you are getting 6% interest for every 6 months. So, if you put money into this
bank account, then after one year it has compounded twice at 6%; the result
is that your fortune has expanded by a factor of (1 + 0.06)
2
, which works out
to be 1.1236. So if you started with $100, you’d finish with $112.36.
The second account is a little better than the first. It makes sense when
you think about it—compounding is beneficial, so compounding more often
at the same annual rate should be better. Let’s try 3 times a year at the
annual rate of 12%. We take 12% and divide by 3 to get 4%, then compound
three times; our fortune has increased by (1 + 0.04)
3
, which works out to be
1.124864. This is a little higher still. How about 4 times a year? That’d be
(1 + 0.03)
4
, which is approximately 1.1255. That’s even higher. Now, the
question is, where does it stop? If you compound more and more often at the
same annual rate, do you get wads and wads of cash after a year, or is there
some limitation on all this?
9.2.2 The answer to our question
To answer our question, let’s turn to some symbols. First, let’s suppose that
we are compounding n times a year at an annual rate of 12%. This means
that each time we compound, the amount of compounding is 0.12/n. After
this happens n times in one year, our original fortune has grown by a factor
of
1 +
0.12
n
n
.
We want to know what happens if we compound more and more often; in
fact, let’s allow n to get larger and larger. That is, we’d like to know what