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

Equivalent fractions, what is 6/36 as two equivalent fractions 2/12 as tw...

what is 6/36 as two equivalent fractions 2/12 as two equivalent fractions 4/28 3/21 2/11 4/13=8/x 12/30=n/90 q/54=2/9 3/7 14/h=7/20

Exponents, i need help with exponents and how to add them

i need help with exponents and how to add them

Factoring trinomial, what is the factor of the trinomial 2x2-7x-4

what is the factor of the trinomial 2x2-7x-4

What was the original price of the frying pan, Cory purchased a frying pan ...

Cory purchased a frying pan which was on sale for 30% off. She saved $3.75 along with the sale. What was the original price of the frying pan? Use a proportion to ?nd out the o

Prove that if x is a real number then [2x] = [x] + [x + ½ ], Prove that if...

Prove that if x is a real number then [2x] = [x] + [x + ½ ] Ans: Let us consider x be any real number. It comprises two parts: integer and fraction. With no loss of

Determine the determinant of matrix, Example Determinant:   Determine ...

Example Determinant:   Determine the determinant of each of the following matrices. Solution : For the 2 x 2 there isn't much to perform other than to plug this in

How much interest will she have made after 4 years, Celine deposited $505 i...

Celine deposited $505 into her savings account. If the interest rate of the account is 5% per year, how much interest will she have made after 4 years? Use the formula F = 9/5

Simple interest, find the simple interest on Rs. 68,000 at 50/3 per annum f...

find the simple interest on Rs. 68,000 at 50/3 per annum for 9 month

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