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

Discrete uniform distribution, Discrete Uniform Distribution Acme Limit...

Discrete Uniform Distribution Acme Limited is a car manufacturer. The company can paint the car in 3 possible colors: White, Black and Blue. Until the population is sampled, th

Chanllenge, a pizza driver delivered 27 pizzas in one night he delivered mo...

a pizza driver delivered 27 pizzas in one night he delivered more then one pizza to only one house . every other house he only delivered pizza to 18 houses . how many pizzas did he

Determine rank correlation coefficient , Determine Rank Correlation Coe...

Determine Rank Correlation Coefficient A group of 8 accountancy students are tested in Quantitative Techniques and Law II.  Their rankings in the two tests were as:

Combinations, evaluate the expression a) 10C4 b) 10P4.....I do not under...

evaluate the expression a) 10C4 b) 10P4.....I do not understand this

Converting mixed numbers to improper fractions, Q. Converting Mixed Numbers...

Q. Converting Mixed Numbers to Improper Fractions? Ans. Converting a mixed number to an improper fraction is easy. A single multiplication, and then a single addition:

Algebra, simplify mn+mp+nq+pq /n+p

simplify mn+mp+nq+pq /n+p

Find the value of delta, Consider the given graph G below. Find δ( G )=__...

Consider the given graph G below. Find δ( G )=_____ , λ( G )= _____ , κ( G )= _____, number of edge-disjoint AF -paths=_____ , and number of vertex-disjoint AF -paths= ______

Activity example of one to one correspondence learning, Devise one activity...

Devise one activity each to help the child understand 'as many as' and 'one-to-one correspondence'. Try them out on a child/children in your neighbourhood, and record your observat

Find the volume of a cylinder of radius r, Find the volume of a cylinder of...

Find the volume of a cylinder of radius r and height h. Solution : Here, as we mentioned before starting this illustration we actually don't require using an integral to get t

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