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

Explain comparing mixed numbers in maths, Explain Comparing Mixed Numbers i...

Explain Comparing Mixed Numbers in maths? A mixed number is made up of two parts: a whole number and a fraction. For example: 2(3/4) 2(3/4) is read "two and three-fourths

Decimals, how to make 2.3 into a fraction?

how to make 2.3 into a fraction?

College Algebra, Find the center and radius of the circle whose equation is...

Find the center and radius of the circle whose equation is 3 x^2 - 8 x+ 3 y^2+ 4 y+ 2 = 0

Numertic methods, solve by factorization method; 10x-6y-3z=100, -6x+10y-5z=...

solve by factorization method; 10x-6y-3z=100, -6x+10y-5z=100, -3x-5y+10z=100

Arithmetic/Geometric Sequences and Binomial Expansion, Find the 35th term o...

Find the 35th term of the sequence in which a1 = -10 and the common difference is 4.

Sin3? = cos2? find the most general values of ?, sin3θ = cos2θ find the mos...

sin3θ = cos2θ find the most general values of θ satisfying the equatios? sinax + cosbx = 0 solve ? Solution)  sin (3x) = sin(2x + x) = sin(2x)cos(x) + cos(2x)sin(x) = 2sin(x)cos(

Systems of differential equations, In the introduction of this section we b...

In the introduction of this section we briefly talked how a system of differential equations can occur from a population problem wherein we remain track of the population of both t

Determine the centralizer and the order of the conjugacy, Determine the cen...

Determine the centralizer and the order of the conjugacy: 1)      Determine the centralizer and the order of the conjugacy class of the matrix [1, 1; 0, 1] in Gl­ 2 (F 3 ).

Homework, joey asked 30 randomly selected students if they drank milk, juic...

joey asked 30 randomly selected students if they drank milk, juice, or bottled water with their lunch. He found that 9 drank milk, 16 drank juice, and 5 drank bottled water. If the

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