Continuous compounding, Mathematics

Assignment Help:

If r per annum is the rate at which the principal A is compounded annually, then at the end of k years, the money due is

         Q = A (1 + r)k

Suppose compounding is done continuously. i.e. at every instant the principal A is compounded at R per annum. Then,

         Q = A eRk

The relationship between R and r is given by the following reasoning:

         A (1 + r)k = A eRk

This implies,      
(1 + r)k = (eR)k  
1 + r = eR  
r = eR - 1  
R = ln (1 + r)  

Example 

If R   = 5.25%, then ln(1 + r) = 5.25% or r = 5.39%

Example 

Suppose Rs.100 is being compounded annually at the rate of 10% per annum. What is the future value of Rs.100 at the end of the third year? What is the effective continuously compounded rate of interest? What is the future value of Rs.100 at the end of the third year, using this interest rate?

FV(Rs.100) = 100 x (1.10)3  = 133.1

If r = 0.1, then the continuously compounded rate of interest R is given by

R = ln(1 + 0.1) = 0.0953

FV(Rs.100) = 100 e0.0953 x 3 = 100 x 1.331 = 133.1


Related Discussions:- Continuous compounding

Statistics, A researcher is investigating the effectiveness of a new medica...

A researcher is investigating the effectiveness of a new medication for lowering blood pressure for individuals with systolic pressure greater than 140. For this population, systol

Uniform distribution over the interval, High temperatures in certain city i...

High temperatures in certain city in the month of August follow uniform distribution over the interval 60-85 F. What is probability that a randomly selected August day has a Temper

Determine if the following sequences converge or diverge, Determine if the ...

Determine if the following sequences converge or diverge.  If the sequence converges find out its limit. a. {3n 2 - 1 / 10n + 5n 2 } ∞ n =2 b. {e 2n / n} ∞ n =1 c

Hypothesis test, Describe, in your own words, the following terms and give ...

Describe, in your own words, the following terms and give an example of each. Your examples are not to be those given in the lecture notes, or provided in the textbook. By the en

Proof of various integral facts- formulas, PROOF OF VARIOUS INTEGRAL FACTS/...

PROOF OF VARIOUS INTEGRAL FACTS/FORMULAS/PROPERTIES In this section we've found the proof of several of the properties we saw in the Integrals section and also a couple from t

..percentage, how to express 15/4 into percentage

how to express 15/4 into percentage

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd