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

Percentages, how to remember the formulas of this topic

how to remember the formulas of this topic

Area between curves, Area between Curves In this section we will be fi...

Area between Curves In this section we will be finding the area between two curves. There are in fact two cases that we are going to be looking at. In the first case we des

Prime Ideals, Given a standard 2x3 matrix show the ideal formed by the 2x2 ...

Given a standard 2x3 matrix show the ideal formed by the 2x2 minors is Prime.

Find the initial number of balls, Balls are arranged in rows to form an equ...

Balls are arranged in rows to form an equilateral triangle .The first row consists of one ball, the second two balls and so on.   If 669 more balls are added, then all the balls ca

Use newtons method to find out an approximation, Use Newton's Method to fin...

Use Newton's Method to find out an approximation to the solution to cos x = x which lies in the interval [0,2].  Determine the approximation to six decimal places. Solution

Test of homogeneity , Test of homogeneity This is concerned along with...

Test of homogeneity This is concerned along with the proposition that several populations are homogenous along with respect to some characteristic of interest for example; one

Fraction, how do you add fraction

how do you add fraction

Word problems, please can you help me with word problems

please can you help me with word problems

Determine the velocity and position functions of object, Determine if the a...

Determine if the acceleration of an object is given by a → = i → + 2 j → + 6tk → find out the object's velocity and position functions here given that the initial velocity is v

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