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

Calculate the instantaneous rate of change of the volume, Assume that the a...

Assume that the amount of air in a balloon after t hours is specified by                                             V (t ) = t 3 - 6t 2 + 35 Calculate the instantaneous

Exercise of concrete operational stage, Which of the following statements d...

Which of the following statements do you think are true about children? Indicate with 'T' for true and for false. Give reasons for your choice. a) Most primary school children a

Rolle''s theorem, The curve (y+1) 2 =x 2 passes by the points (1, 0) and ...

The curve (y+1) 2 =x 2 passes by the points (1, 0) and (- 1, 0). Does Rolle's Theorem clarify the conclusion that  dy dx  vanishes for some value of x in the interval -1≤x≤1?

Rates of change and tangent lines in limits, Rates of Change and Tangent Li...

Rates of Change and Tangent Lines : In this section we will study two fairly important problems in the study of calculus. There are two cause for looking at these problems now.

Title expressions equivalent, 2x40 420x4 7x240 84x20 Explain h...

2x40 420x4 7x240 84x20 Explain how three expressions are equivalent.

Three dimensional geometry, Three Dimensional geometry Intorduction ...

Three Dimensional geometry Intorduction In earlier classes we studied about the coordinates in two planes that is the XY plane. Here we are going to study in detail about th

Undetermined coefficients, UNDETERMINED COEFFICIENTS The way of Undeter...

UNDETERMINED COEFFICIENTS The way of Undetermined Coefficients for systems is pretty much the same to the second order differential equation case. The simple difference is as t

Produce the individual answers and the insights in maths, It is difficult t...

It is difficult to produce the individual answers and the insights that they were providing. But, let's look at some broad patterns that we found, which are similar to those that o

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