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

#Regular Expression, Find the Regular Grammar for the following Regular Exp...

Find the Regular Grammar for the following Regular Expression: a(a+b)*(ab*+ba*)b.

Differential equations, verify liouville''s theorem for y''''''-y''''-y''+...

verify liouville''s theorem for y''''''-y''''-y''+y=0

Determine how many player play foot ball, Determine How many player play fo...

Determine How many player play foot ball? In a group of athletic teams in a specific institute, 21 players are in the basket ball team, 26 players in the hockey team, 29 player

About algebra, how do i compute an algebra number

how do i compute an algebra number

Unitary method, what is history of Unitary method

what is history of Unitary method

What is the limit of sin (1/x) when x tends to zero?, As x tends to zero th...

As x tends to zero the value of 1/x tends to either ∞ or -∞. In this situation we will not be sure about the exact value of 1/x. As a result we will not be sure about the exact/app

What is the measure of its width if its length is 3 inches, The perimeter o...

The perimeter of a rectangle is 21 inches. What is the measure of its width if its length is 3 inches greater than its width? Let x = the width of the rectangle. Let x + 3 = th

Subjective probability, Subjective Probability Probability may be de...

Subjective Probability Probability may be determined by a personal statement of how likely an outcome is in a single trial or repetition of the same experiment. Since sub

Computing change for a given coin system, This problem involves the questio...

This problem involves the question of computing change for a given coin system. A coin system is defined to be a sequence of coin values v1 (a) Let c ≥ 2 be an integer constant

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