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

The width of a rectangle is 30.5% of its length, The width of a rectangle i...

The width of a rectangle is 30.5% of its length l. Write a formula for the area and perimeter of the rectangle in terms of l only

Evaluate the diameter of the pizza box, If the area of a small size pizza i...

If the area of a small size pizza is 78.5 in 2 , what size pizza box would required for the small pizza? (Note: Pizza boxes are calculated according to the length of one side.)

Find the values of k, If the vertices of a triangle are (1, k), (4, -3), (-...

If the vertices of a triangle are (1, k), (4, -3), (-9, 7) and its area is 15 sq units, find the value(s) of k..

Precal, The law of cosines can only be applied to acute triangles. Is this ...

The law of cosines can only be applied to acute triangles. Is this true or false?

Explain mixed numbers with examples, Explain Mixed Numbers with examples? ...

Explain Mixed Numbers with examples? Everybody loves a bargain, right? But sometimes these "special deals" aren't what they seem to be. For example, pretend you were at a

Life mathametics, 20% of the total quantity of oil is 40 litres find the to...

20% of the total quantity of oil is 40 litres find the total quantity of oil in litres

Probability, TWO PERSONS A AND B AGREE TO MEET AT A PLACE BTWEEN 11 TO 12 N...

TWO PERSONS A AND B AGREE TO MEET AT A PLACE BTWEEN 11 TO 12 NOON.  THE FIRST ONE TOARRIVE WAITS FOR 20 MIN AND THEN LEAVE. IF THE TIME OF THIR ARRIVAL BE INDEPENDET AND AT RNDOM,T

Reason why we start division, Reasons why we start division : The reason w...

Reasons why we start division : The reason we start division by considering the digit in the leftmost place is efficiency and ease . For instance, suppose we divide 417 by 3, we

Some important issue of graph, Some important issue of graph Before mov...

Some important issue of graph Before moving on to the next example, there are some important things to note. Firstly, in almost all problems a graph is pretty much needed.

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