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

What division means, WHAT DIVISION MEANS :  Ask any primary school teacher...

WHAT DIVISION MEANS :  Ask any primary school teacher which areas in arithmetic the children find very difficult. Division will probably top her list. This is not surprising. If y

Cone - three dimensional spaces, Cone - Three dimensional spaces The be...

Cone - Three dimensional spaces The below equation is the general equation of a cone. X 2 / a 2 + y 2 /b 2 = z 2 /c 2 Here is a diagram of a typical cone. Not

Calculate the profits per acre strategy, A farmer grows apples on her 600 a...

A farmer grows apples on her 600 acre farm and must cope with occasional infestations of worms. If she refrains from using pesticides, she can get a premium for "organically grown"

Identify the children strategies to solve maths problems, Here are four pro...

Here are four problems. Four children solved one problem each, as given below. Identify the strategies the children have used while solving them. a) 8 + 6 = 8 + 2 + 4 = 14 b)

Matrices, problem faced by students

problem faced by students

What price tag will he put on the item, The manager of a specialty store ma...

The manager of a specialty store marks up imported products 110%. If a vase imported from Italy costs him $35, what price tag will he put on the item? To ?nd out the price he s

Find the area of parallelogram, Find the area of PARALLELOGRAM ? A para...

Find the area of PARALLELOGRAM ? A parallelogram is a four-sided shape, of which the opposite sides are parallel. (Because they are parallel, opposite sides also have the same

Operations with rational numbers, larry spends 3/4 hours twice a day walkin...

larry spends 3/4 hours twice a day walking and playing with his dog. He spends 1/6 hours twice a day feeding his dog. how much time does larry spend on his dog each day?

Horizontal asymptote, The horizontal asymptote of (16x+7)(x^2-5)/(x^2+36).

The horizontal asymptote of (16x+7)(x^2-5)/(x^2+36).

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