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

Find the perimeter and the area of the shaded portion, The given figure con...

The given figure consists of four small semicircles and two big semicircles.  If the smaller semicircles are equal in radii and the bigger semicircles are also equal in radii, find

Find the value of the derivative, Given y = f(x) = x 2 + 2x +3 a) Use the ...

Given y = f(x) = x 2 + 2x +3 a) Use the definitional formula given below to find the derivative of the function. b) Find the value of the derivative at x = 3.

Calculate zeros in the denominator of rational expressions, About Zeros in ...

About Zeros in the Denominator of Rational Expressions One thing that you must be careful about when working with rational expressions is that the denominator can never be zero

Faltings theorem, What is Faltings Theorem? Explain Faltings Theorem

What is Faltings Theorem? Explain Faltings Theorem

Laplace transforms, As we saw in the previous section computing Laplace tra...

As we saw in the previous section computing Laplace transforms directly can be quite complex. Generally we just utilize a table of transforms when actually calculating Laplace tran

Explain simple classification and chance and probability, E1) From your exp...

E1) From your experience, and what you have studied so far, by which age would-you expect an average child to be ready to acquire the following concepts? i) Simple classificatio

Eometry constructions, construct an isosceles triangle ABC when:base BC is ...

construct an isosceles triangle ABC when:base BC is 6.2 and altitude a.a

Multiples, The sum of the smallest and largest multiples of 8 up to 60 is?

The sum of the smallest and largest multiples of 8 up to 60 is?

Shares and dividend, a man in rested rupee 800 is buying rupee 5 shares and...

a man in rested rupee 800 is buying rupee 5 shares and then are selling at premium of rupee 1.15. He sells all the shares.find profit

#title.heat loss in a cylindrical pipe., briefly explain how the famous equ...

briefly explain how the famous equation for the loss of heat in a cylindrical pipe is derived

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