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

Infinite interval - improper integrals, Infinite Interval  - Improper Inte...

Infinite Interval  - Improper Integrals In this type of integral one or both of the limits that is upper limit and lower limit of integration are infinity.  In these cases the

Index numbers, advantages and disadvantages of index numbers

advantages and disadvantages of index numbers

Number sequence, what is the formula to find a sequence on a string of numb...

what is the formula to find a sequence on a string of numbers?

???, a deposit of 10,000 was made to an account the year you were born afte...

a deposit of 10,000 was made to an account the year you were born after 12 years the account is worth 16,600 what is the simple interest rate did the account earn?

How many cubic centimetres of cork dust will be required?, A cylindrical ve...

A cylindrical vessel of diameter 14 cm and height 42 cm is fixed symmetrically inside a similar vessel of diameter 16 cm and height 42 cm. The total space between two vessels is fi

Introduction to the normal distribution, Q. Introduction to the Normal Dist...

Q. Introduction to the Normal Distribution? Ans. The Binomial distribution is a model for what might happen in the future for a discrete random variable. The Normal Distri

Positive skewness-measure of central tendency, Positive Skewness - It ...

Positive Skewness - It is the tendency of a described frequency curve leaning towards the left. In a positively skewed distribution, the long tail extended to the right. In

Brian 100-yard dash time was 2.68 what is the school record, Brian's 100-ya...

Brian's 100-yard dash time was 2.68 seconds more than one school record. Brian's time was 13.4 seconds. What is the school record? The school record is less than Brian's time.

Fraction, 5645.356 turn into fraction

5645.356 turn into fraction

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