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 limit, The Limit : In the earlier section we looked at some problems ...

The Limit : In the earlier section we looked at some problems & in both problems we had a function (slope in the tangent problem case & average rate of change in the rate of chan

Linear Equations, Tommy has a Nexus 4 that charges poorly. He placed his ph...

Tommy has a Nexus 4 that charges poorly. He placed his phone to charge,after 20 minutes the phone was 27% and after 85 minutes the phone was at 66%. Find how many percentage the p

Harmonic mean, If a, b and c are in harmonic progression with b as th...

If a, b and c are in harmonic progression with b as their harmonic mean then, b  = This is obtained as follows. Since a, b and c are in

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

Addition of like terms with same signs, Case 1: Suppose we are given...

Case 1: Suppose we are given expressions like 3abc and 7abc and asked to compute their sum. If this is the case we should not worry much. Because adding like exp

Determine probability , You are going on a road trip and you buy snack pack...

You are going on a road trip and you buy snack packs and three different kind of beverages.  You buy 7 Cokes, 5 Pepsis and 4 Dr. Peppers.  You pull out two beverages at random.  An

Word problems fraction, Savannah''s mom made a fruit smoothie that tasted s...

Savannah''s mom made a fruit smoothie that tasted so good. She put in one-fourth of a cup of diced apples, one-fifth of a cup of sliced oranges, along with half of a cup of yogurt

How many hours will it take before the cars are 610 miles, Two commuters le...

Two commuters leave the similar city at the same time but travel in opposite directions. One car is traveling at an average speed of 63 miles per hour, and the other car is traveli

Properties of triangle, In triangle ABC, cosecA(sinB.sinC+cosB.sinC) is equ...

In triangle ABC, cosecA(sinB.sinC+cosB.sinC) is equal to..?

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