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

Standard deviation, Certain model of new home distributed with a mean of $1...

Certain model of new home distributed with a mean of $150,000. Find percentage of buyers who paid between $150,000-155,000 if standard deviation is $1800.

What is the larger dimension in inches of the frame, Jessica has a picture ...

Jessica has a picture in a frame with a total area of 288 in2. The dimension of the picture without the frame is 12 in through 14 in. What is the larger dimension, in inches, of th

Rules of logarithms, Rule 1 The logarithm of 1 to any base is 0. Pro...

Rule 1 The logarithm of 1 to any base is 0. Proof We know that any number raised to zero equals 1. That is, a 0 = 1, where "a" takes any value. Therefore, the loga

Halm''s differential equation, please i need the solution for halm''s diffe...

please i need the solution for halm''s differential equation

Simplification, 4.4238/[1.047+{1.111*[9.261/7.777]}*1.01

4.4238/[1.047+{1.111*[9.261/7.777]}*1.01

Value of the game-game theory, Value Of The Game The game value refers ...

Value Of The Game The game value refers to the average pay off per play of the game over an extended period of time

Integration by parts -integration techniques, Integration by Parts -Integra...

Integration by Parts -Integration Techniques Let's start off along with this section with a couple of integrals that we should previously be able to do to get us started. Fir

Examples of repetition need not be boring- learning maths, E1) Try and see ...

E1) Try and see the order in which different children fills numbers in the grid above. My claim is that all of them would fill in the ones, the fives and the tens first. Test my hy

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