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

Multiple linear regression models, Multiple Linear Regression Models T...

Multiple Linear Regression Models There are situations whether there is more than one factor which influence the dependent variable Illustration Cost of production weekl

Geometry, #question.prove that the diagonals of a trapezium divide each oth...

#question.prove that the diagonals of a trapezium divide each other proportionally .

Solve 5x tan (8x ) =3x trig function, Solve 5x tan (8x ) =3x . Solution...

Solve 5x tan (8x ) =3x . Solution : Firstly, before we even begin solving we have to make one thing clear.  DO NOT CANCEL AN x FROM BOTH SIDES!!! Whereas this may appear like

Give the examples in real world of proportions , Give the Examples in Real ...

Give the Examples in Real World of Proportions? Proportions can be used in cooking. For example, the following is a set of ingredients for a pasta called "Spaghetti All' Amatri

Heat loss in cylindrical pipe, which physics law is used to describe heat l...

which physics law is used to describe heat loss in cylindrical pipe

Equivalence relation, a) Let V = f1, 2, :::, 7g and define R on V by xRy if...

a) Let V = f1, 2, :::, 7g and define R on V by xRy iff x -  y is a multiple of 3. You should know by now that R is an equivalence relation on V . Suppose that this is so. Explain t

Process for solving linear equations, 1. If the equation has any fractions ...

1. If the equation has any fractions employ the least common denominator to apparent the fractions. We will do this through multiplying both sides of the equation by the LCD. Al

Probability that a leap year will have 53 sunday?explain, A leap year has 3...

A leap year has 366 days, therefore 52 weeks i.e. 52 Sunday and 2 days. The remaining 2 days may be any of the following : (i) Sunday and Monday (ii) Monday and Tuesday (iii)

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