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

The index of industrial production, The index of industrial production ...

The index of industrial production This is a quantity index compiled by the government. This measures changes in the volume of production in main industries. The index is a ex

What percent the girls surveyed said that area hockey sport, 450 girls were...

450 girls were surveyed about their favorite sport, 24% said in which basketball is their favorite sport, 13% said in which ice hockey is their favorite sport, and 41% said which s

Draw grouped frequency tables, Q. Draw Grouped Frequency Tables? Ans. ...

Q. Draw Grouped Frequency Tables? Ans. Grouped frequency tables are often used when there are many different values. In these tables, the values are grouped into classes

Indeterminate form, Indeterminate form : The 0/0 we initially got is calle...

Indeterminate form : The 0/0 we initially got is called an indeterminate form. It means that we don't actually know what it will be till we do some more work.  In the denominator

Operations research, scope of operation research and its limitations

scope of operation research and its limitations

Ellipse, alpha and beta are concentric angles of two points A and B on the ...

alpha and beta are concentric angles of two points A and B on the ellipse.

Vectors - calculus, Vectors  This is a quite short section. We will b...

Vectors  This is a quite short section. We will be taking a concise look at vectors and a few of their properties. We will require some of this material in the other section a

Determine the displacement, Example: A 16 lb object stretches a spring 8/9...

Example: A 16 lb object stretches a spring 8/9 ft by itself. Here is no damping as well as no external forces acting on the system. The spring is firstly displaced 6 inches upward

Probability that a leap year will have 53 sunday?explain, A leap year has 3...

A leap year has 366 days, therefore 52 weeks i.e. 52 Sunday and 2 days. The remaining 2 days may be any of the following : (i) Sunday and Monday (ii) Monday and Tuesday (iii)

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