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

Example of exponential smoothing, Example of Exponential Smoothing ...

Example of Exponential Smoothing By using the previous example and smoothing constant 0.3 generate monthly forecasts Months Sales Forecast

Levels of significance - rejection and acceptance regions, Levels of signif...

Levels of significance A level of significance is a probability value which is utilized when conducting tests of hypothesis. A level of significance is mostly the probability

Find no. of diagonals, In a polygon no 3 diagnols are concurrent. If the to...

In a polygon no 3 diagnols are concurrent. If the total no of points of intersection are 70 ( interior ). find the no. of diagnols? Ans) Since no 3 diagonals are concurrent, There

6, 200000+500

200000+500

Reason for why limits not existing, Reason for why limits not existing : I...

Reason for why limits not existing : In the previous section we saw two limits that did not.  We saw that did not exist since the function did not settle down to a sing

How far is balloon from the shore, Steve Fossett is going the shores of Aus...

Steve Fossett is going the shores of Australia on the ?rst successful solo hot air balloon ride around the world. His balloon, the Bud Light Spirit of Freedom, is being escorted

Find out the surface area of the solid - parametric curve, Find out the sur...

Find out the surface area of the solid acquired by rotating the following parametric curve about the x-axis. x = cos 3 θ y = sin 3 θ  0 ≤ θ ≤ ?/2 Solution We wil

Find the third vertex of a triangle, Find the third vertex of a triangle if...

Find the third vertex of a triangle if its two vertices are (-1, 4) and (5, 2) and mid point of one side is (0, 3).

What is the new cost of the pants, A pair of pants costs $24. The cost was ...

A pair of pants costs $24. The cost was decreased by 8%. What is the new cost of the pants? If the cost of the pants is decreased by 8%, the cost of the pants is 92 percent of

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