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

Calculate the limit of f (-4), Let's take a look at one more example to ens...

Let's take a look at one more example to ensure that we've got all the ideas about limits down that we've looked at in the last couple of sections. Example: Given the below gr

Continuity, Continuity : In the last few sections we've been using the te...

Continuity : In the last few sections we've been using the term "nice enough" to describe those functions which we could evaluate limits by just evaluating the function at the po

Spurious correlations, Spurious Correlations - in several rare situati...

Spurious Correlations - in several rare situations when plotting the data for x and y we may have a group indicating either positive correlation or negative (-ve) correlation

Parenteral calculations, 850ml is to be administered to a person over 8 hou...

850ml is to be administered to a person over 8 hours using a drop factor of 20 drops/ml what is the flow rate in gtts/min ?

Determine coefficient of traction, Problem 1 Work through TALPAC 10 Bas...

Problem 1 Work through TALPAC 10 Basics (refer to attached handout). Answer the set of questions at the end of tutorial module. Problem 2 Referring to both the haul cyc

Math, a business is owned by three people.the first owns 1/12 of the busine...

a business is owned by three people.the first owns 1/12 of the business and the second owns 1/6 of the business. what fractional part of the business is owned by the third person

Marketing management, successful marketing research relies on accurate iden...

successful marketing research relies on accurate identification of the research objectives. Critically discuss when setting relevant research objectives, drawing on marketing theor

Math 100, introduction to decimals

introduction to decimals

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