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

Write 3.5 × 104 in decimal notation, Write 3.5 × 104 in decimal notation? ...

Write 3.5 × 104 in decimal notation? Move the decimal point 4 places to the right to get 35,000.

Statistics, do we calculate midpoints from classes or from class boundaries...

do we calculate midpoints from classes or from class boundaries

Example of identify the pre-requisites, Ravi is a teacher of Class 4 in a m...

Ravi is a teacher of Class 4 in a municipal school in Delhi. When the new school year started, he opened the textbook and started teaching the children how to write 4-digit numbers

Set builder notation, For inequalities we contain a similar notation.  Base...

For inequalities we contain a similar notation.  Based on the complexity of the inequality the solution set might be a single number or it might be a range of numbers. If it is jus

Constructing a dfa/nfa or a regex), Let ∑ = (0, 1). Define the following la...

Let ∑ = (0, 1). Define the following language: L = {x | x contains an equal number of occurrences of 01 and 10} Either prove L is regular (by constructing a DFA/NFA or a rege

Video games, Should video game companies continue to alter their products t...

Should video game companies continue to alter their products to include other functions, such as e-mail

Algebra, please tell me what is algebra and how i can understand it

please tell me what is algebra and how i can understand it

Find the lesser of two consecutive positive even integers, Find the lesser ...

Find the lesser of two consecutive positive even integers whose product is 168. Let x = the lesser even integer and let x + 2 = the greater even integer. Because product is a k

Divisiblety test, find the greater value of a and b so that the following e...

find the greater value of a and b so that the following even numbers are divisible by both 3 and 5 : 2ab2a

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