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

Core concepts, what are the core concept of marketing

what are the core concept of marketing

Equation of the line which passes through the two points, Example: Write do...

Example: Write down the equation of the line which passes through the two points (-2, 4) and (3, -5). Solution At first glance it might not appear which we'll be capable to

Triangles, ABC is a triangle right angled at c. let BC=a, CA=b, AB=c and lr...

ABC is a triangle right angled at c. let BC=a, CA=b, AB=c and lrt p be the length of the perpendicular from C on AB. prove that cp=ab and 1/p2=1/a2+1/b2

Range, identify the range of h(x)=2x+1

identify the range of h(x)=2x+1

Marketig research report , need help to write Marketing research reprot abo...

need help to write Marketing research reprot about IBM company using spss (statistical program) to analys the given data about the company and write the report according to given i

Rational numbers, Although the set of integers caters to a larger aud...

Although the set of integers caters to a larger audience, it is inadequate. This inadequacy has led to the formulation of Rational numbers. Rational numbers are of

How to calculate mode, Q. How to calculate Mode? The mode of a data set...

Q. How to calculate Mode? The mode of a data set is the value that is repeated most often in the data set. It has the highest frequency. There can be one, more than one, or n

Stats, the automatic hopper loader is set to put 36 tons of coal in each ca...

the automatic hopper loader is set to put 36 tons of coal in each car. the actual weights of coal loaded into each car arw normally distributed with a mean of 36 tons and a standar

Longer- term forecasting, Longer- Term Forecasting Moving averages, ex...

Longer- Term Forecasting Moving averages, exponential smoothing and decomposition methods tend to be utilized for short to medium term forecasting. Longer term forecasting is

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