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 invisible effort on learning maths, The Invisible Effort :   Although t...

The Invisible Effort :   Although the development of children is a process, what is noticed and given recognition to is the end-product. We usually speak of children having achieve

What are natural numbers and whole numbers, What are Natural Numbers and Wh...

What are Natural Numbers and Whole Numbers? Natural numbers are the numbers that you "naturally" use for counting: 1, 2, 3, 4, ... The set of whole numbers is the set of

The central limit theorem, The Central Limit Theorem  The theories was ...

The Central Limit Theorem  The theories was introduced by De Moivre and according to it; if we choose a large number of simple random samples, says from any population and find

What were her sales for the month of may of medical supplies, Kim is a medi...

Kim is a medical supplies salesperson. Each month she receives a 5% commission on all her sales of medical supplies up to $20,000 and 8.5% on her total sales over $20,000. Her tota

Statistics and probability, STATISTICS AND PROBABILITY : Statistics  ar...

STATISTICS AND PROBABILITY : Statistics  are the  only  tools  by  which  an  opening  can  be  cut  through  the formidable  thicket  of difficulties  that bars the  path  of

Standardization of variables, Standardization of Variables - Before we...

Standardization of Variables - Before we use the general distribution curve to determine probabilities of the continuous variables, we require standardizing the original units

Evaluate the slope of the tangent line, Evaluate the given limits, showing ...

Evaluate the given limits, showing all working: Using first principles (i.e. the method used in Example 1, Washington 2009, Using definition to find derivative ) find the

Partial derivatives - set theory, Partial Derivatives Partial derivati...

Partial Derivatives Partial derivatives are used while we want to investigate the effect of one independent variable on dependent variable. For illustration, the revenues of a

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