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

Transportation problem, 12. List the merits and limitations of using North ...

12. List the merits and limitations of using North West corner rule.

Identify the flaw in the argument, Identify the flaw in the following argum...

Identify the flaw in the following argument which supposedly determines that n 2 is even when n is an even integer. As well name the reasoning:             Assume that n 2 is

SHARES AND DIVIDEND, PLEASE PROVIDE SOME STUFF TO WRITE ON SHARES AND DIVID...

PLEASE PROVIDE SOME STUFF TO WRITE ON SHARES AND DIVIDEND

Modulo Arithmetic, What is Modulo Arithmetic and what is an easy way to rem...

What is Modulo Arithmetic and what is an easy way to remember it?

Naive regular perturbation of the form, Consider the equation e x 3 + ...

Consider the equation e x 3 + x 2 - x - 6 = 0, e > 0 (1) 1. Apply a naive regular perturbation of the form do derive a three-term approximation to the solutions

Velocity of derivation, Velocity : Recall that it can be thought of as sp...

Velocity : Recall that it can be thought of as special case of the rate of change interpretation. If the situation of an object is specified by f(t ) after t units of time the vel

Linear equation in two variables., draw the graph of following pair of line...

draw the graph of following pair of linear equation:-2y=4x-6

Operations research, Explain Analytical Models in Operations Research with ...

Explain Analytical Models in Operations Research with Application

Multiplication of complex numbers, Multiplication of complex numbers Af...

Multiplication of complex numbers After that, let's take a look at multiplication.  Again, along with one small difference, it's possibly easiest to just think of the complex n

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