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

Solve simultaneous equations by graphical method, Solve the following pairs...

Solve the following pairs of simultaneous equations by elimination method i.2x+y=10 ii. 3x+y=6 3x-2y=1 5x+y=8 solve the following simult

Homogeneous system , Provided a homogeneous system of equations (2), we wil...

Provided a homogeneous system of equations (2), we will have one of the two probabilities for the number of solutions. 1.   Accurately one solution, the trivial solution 2.

Precalculus help, tsunami equation A sin (b * t) + k what is b supposed t...

tsunami equation A sin (b * t) + k what is b supposed to be if t is time a is amplitude and k is average water level (not exact value of b just what is it)

Find intervals while function is increasing or decreasing, Find out all int...

Find out all intervals where the given function is increasing or decreasing. f ( x ) = - x 5 + 5/2 x 4 + 40/3 x 3 + 5 Solution To find out if the function is increasi

State demorgans law and prove it using the truth table, State DeMorgan's la...

State DeMorgan's law. Prove it using the truth table.   Ans: DeMorgan's law defines that    (i)  (x ∨ y)' = x' ∧ y' (ii)  (x ∧ y)' = x' ∨ y'      Now let us dr

Equations of lines - three dimensional spaces, Equations of Lines In t...

Equations of Lines In this part we need to take a view at the equation of a line in R 3 .  As we saw in the earlier section the equation y = mx+b does not explain a line in R

Parametric equations of parabola., how the parametric equations of parabola...

how the parametric equations of parabola are derived?and what is the condition for the parabola whose equation is in the form of general equation of the two intersecting lines?

Solving multi step equations, can you help me? cause im in 7th grade advanc...

can you help me? cause im in 7th grade advanced math and tomorrow I have a test tomorrow and I don''t get this

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