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

Determine if following sequences are monotonic or bounded, Determine if the...

Determine if the following sequences are monotonic and/or bounded. (a)   {-n 2 } ∞ n=0 (b) {( -1) n+1 } ∞ n=1 (c) {2/n 2 } ∞ n=5 Solution {-n 2 } ∞ n=0

Pre-algebra, How do you solve a table to get the function rule?

How do you solve a table to get the function rule?

Numerical method, The Stefan-Boltzmann law can be employed to estimate the ...

The Stefan-Boltzmann law can be employed to estimate the rate of radiation of energy H from a surface of copper sphere with radius = 0.15 ±0.01 m, as in H=AesT^4 where H is in watt

Find the coordinates of the point p, Find the coordinates of the point P wh...

Find the coordinates of the point P which is three -fourth of the way from A (3, 1) to B (-2, 5).

Prove sum of squares any two sides equal twice square, Prove that in any tr...

Prove that in any triangle the sum of the squares of any two sides is equal to twice the square of half of the third side together with twice the square of the median, which bisect

Geometry, Ask question A triangle has two sides that measure 23 ft and 30 f...

Ask question A triangle has two sides that measure 23 ft and 30 ft. Which could be the measure of the third side? A. 5 ft B. 7 ft C. 10 ft D. 53 ft #Minimum 100 words accepted

What is conditional probability, Q. What is Conditional Probability? A...

Q. What is Conditional Probability? Ans. What is the probability that George will pass his math test if he studies? We can assume that the probabilities of George passing

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