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

Evaluate the circumference of circle, If the diameter of a circle is triple...

If the diameter of a circle is tripled times, the circumference is a. multiplied by 3. b. multiplied by 6. c. multiplied by 9. d. multiplied by 12. a. The formula fo

Concepts, what are core concepts of marketing?

what are core concepts of marketing?

How to solve inequalities, How to Solve Inequalities ? Now that you hav...

How to Solve Inequalities ? Now that you have learned so much about solving equations, you're ready to solve inequalities. You might think that since an equation looks like

Integers, The set of whole numbers also does not satisfy all our requ...

The set of whole numbers also does not satisfy all our requirements as on observation, we find that it does not include negative numbers like -2, -7 and so on. To

Reduce the rational expression to lowest terms, Reduce the following ration...

Reduce the following rational expression to lowest terms.                                     x 2 - 2 x - 8/ x 2 - 9 x + 20 Solution When reducing a rational expressio

Equations, 20 equations that equal 36

20 equations that equal 36

Initial value problems, Write a Matlab function MyIVP that solves an initia...

Write a Matlab function MyIVP that solves an initial-value problem (IVP) for a system of ordinary differential equations (ODEs) of the form x ?(t) = f (t, x(t)), where f : R × Rn ?

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