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 expected average time , A car was machine washes every car in 5 m...

A car was machine washes every car in 5 minutes accurately. It has been calculated that customers will arrive as per to a Poisson distribution at an average of 8 per hour. Calculat

Geometry of convex sets, (a) Given a norm jj jj on Rn, express the closed b...

(a) Given a norm jj jj on Rn, express the closed ball in Rn of radius r with center c as a set. (b) Given a set A and a vector v, all contained in Rn, express the translate of A by

Regression - measures of relationships, Regression - Measures of Relationsh...

Regression - Measures of Relationships - It is a concept that refers to the changes which happen in the dependent variable as a result of changes happens on the independent va

Calculate the profit of company, Company A and Company B have spent a lot o...

Company A and Company B have spent a lot of money on research to develop a cure for the common cold. Winter is approaching and there is certainly going to be a lot of demand for th

Example of elps maths learning, Do you agree with the necessity of the sequ...

Do you agree with the necessity of the sequencing E - L - P - S for learning? If not, then what do you suggest as an alternative path for understanding and internalising mathematic

Find out the dimensions of the field-optimization, We have to enclose a fie...

We have to enclose a field along with a fence. We contain 500 feet of fencing material & a building is on one side of the field & thus won't require any fencing.  Find out the dime

.fractions, what is the difference between North America''s part of the tot...

what is the difference between North America''s part of the total population and Africa''s part

, What is 124 out of 300 in percent

What is 124 out of 300 in percent ?

Find the straight distance between a and b, There is a staircase as shown i...

There is a staircase as shown in figure connecting points A and B. Measurements of steps are marked in the figure. Find the straight distance between A and B. (Ans:10) A ns

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