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

Properties of summation notation, Properties Now there are a couple of ...

Properties Now there are a couple of formulas for summation notation. 1. here c is any number. Therefore, we can factor constants out of a summation. 2. T

Determine the projection - vector, Determine the Projection of b = (2, 1, -...

Determine the Projection of b = (2, 1, -1) onto a = (1, 0, -2) There is a requirement of a dot product and the magnitude of a. a →  • b → = 4                             ||a

Application of linear equations, Application of Linear Equations We ar...

Application of Linear Equations We are going to talk about applications to linear equations.  Or, put in other terms, now we will start looking at story problems or word probl

Geometry, what is the product of the solutions to the equation: x2+4x=-4

what is the product of the solutions to the equation: x2+4x=-4

What is negative exponents explain, What is Negative Exponents explain? ...

What is Negative Exponents explain? Here's a problem which results in a negative exponent: 3 4 /3 7 = 3 (4-7) = 3 -3 A negative exponent means the same thing as making

Solution to an equation or inequality, First, a solution to an equation or ...

First, a solution to an equation or inequality is any number that, while plugged into the equation/inequality, will satisfy the equation/inequality. Thus, just what do we mean by

.gradient, Draw the graph of y=x^2-4x from x=-1 to x=5.use the scale of 2cm...

Draw the graph of y=x^2-4x from x=-1 to x=5.use the scale of 2cm on the x axis and 1cm on the y axis.Estimate the gradient at point:x=4, x=2 and x=0

Determine the average bit rate - huffman codebook, 1. Consider a source wi...

1. Consider a source with 4 symbols {a,b,c,d}. The probability of the 4 symbols are P(a)=0.4, p(b) = 0.1, p(c)=0.2, p(d)= 0.3. a. Design a Huffman codebook for these symbols.

Estimate the area between f ( x ) =x3 - 5x2 + 6 x + 5, Estimate the area be...

Estimate the area between f ( x ) =x 3 - 5x 2 + 6 x + 5 and the x-axis by using n = 5 subintervals & all three cases above for the heights of each of the rectangle. Solution

Square of a number added to 25 equals 10 times the number, The square of a ...

The square of a number added to 25 equals 10 times the number. What is the number? Let x = the number.  The statement, "The square of a number added to 25 equals 10 times the n

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