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

Area of a circle, How do you find the area of a circle given the diameter?

How do you find the area of a circle given the diameter?

Quardrilatrel, construct aquadrilaterl PQRSin which pq=3.5cm qr=6.5cm ,p=60...

construct aquadrilaterl PQRSin which pq=3.5cm qr=6.5cm ,p=60 ,q=105 ,s=75

The bionomial theorem for rational index, use the bionomial theorem to expa...

use the bionomial theorem to expand x+2/(2-X)(WHOLE SQUARE 2)

Need answer!, what is the basic unit of weight in the metric system?

what is the basic unit of weight in the metric system?

Find the height of the lighthouse, Two  ships  are  sailing  in  the  sea  ...

Two  ships  are  sailing  in  the  sea  on  either  side  of  a  lighthouse;  the  angles  of depression of two ships as observed from the top of the lighthouse are 600  and 450 re

Functions, find the domain of the function f(x) = (| sin inverse sin x | - ...

find the domain of the function f(x) = (| sin inverse sin x | - cos inverse cos x) ^ 1/2

Unconditional and conditional probability, Two events A and B are ind...

Two events A and B are independent events if the occurrence of event A is in no way related to the occurrence or non-occurrence of event B. Likewise for independent

Erp for a company, recomendation to a company to implement ERP to succeed

recomendation to a company to implement ERP to succeed

Word problem, adison earned $25 mowing her neighbor''s lawn. then she loane...

adison earned $25 mowing her neighbor''s lawn. then she loaned her friend $18, and got $50 from her grandmother for her birthday. she now has $86. how much money did adison have to

Equivalent fractions, what is 6/36 as two equivalent fractions 2/12 as tw...

what is 6/36 as two equivalent fractions 2/12 as two equivalent fractions 4/28 3/21 2/11 4/13=8/x 12/30=n/90 q/54=2/9 3/7 14/h=7/20

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