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

Evaluate the definite integral, Evaluate the given definite integral. ...

Evaluate the given definite integral. Solution                      Let's begin looking at the first way of dealing along with the evaluation step. We'll have to be c

Three times the larger of the two numbers, If three times the larger of the...

If three times the larger of the two numbers is divided by the smaller, then the quotient is 4 and remainder is 5. If 6 times the smaller is divided by the larger, the quotient is

Arithmetico geometric progression, find the sum of the following series upt...

find the sum of the following series upto n terms: 1*2+2*4+3*8+4*16+.....

the jetstream''s speed, A passenger jet took 3 hours to fly 1800 km in the...

A passenger jet took 3 hours to fly 1800 km in the direction of the jetstream. The return trip against the jetstream took four hours. What was the jet's speed in still air and the

Critical point of exponential functions and trig functions, Critical point ...

Critical point of exponential functions and trig functions, Let's see some examples that don't just involve powers of x. Example:  find out all the critical points for the

Geometry, find the value of 0 that makes cos 21 degrees = sin 0 statement t...

find the value of 0 that makes cos 21 degrees = sin 0 statement true.

Describe the introduction to integers, Describe the Introduction to Integer...

Describe the Introduction to Integers ? Integers include the positive and negative whole numbers, such as -4, -3, -2, -1, 0, 1, 2, 3, 4, and so on. A negative number has a "

Draw a common graph f ( x ) = |x|, Graph f ( x ) = |x| Solution The...

Graph f ( x ) = |x| Solution There actually isn't much to in this problem outside of reminding ourselves of what absolute value is. Remember again that the absolute value f

Shortcomng methods for teaching hto in maths, 1.What are the strengths and ...

1.What are the strengths and shortcomings of the methods of teaching H T 0 in Examples 1 and 2? 2. a) Think of another activity for getting children to practise H T 0, especia

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