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

Whats this, how do you determine if a graph has direct variation

how do you determine if a graph has direct variation

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

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

The definite integral- area under a curve, The Definite Integ...

The Definite Integral Area under a Curve If there exists an irregularly shaped curve, y = f(x) then there is no formula to find out

probability that the card is a 8 or an ace, A standard deck of cards conta...

A standard deck of cards contains 52 cards. One card is selected at random. Determine a)    The probability that the card is a 8 or an Ace? b)    The probability that the card is

Solution by factorization, Solution by Factorization, please solve quadrati...

Solution by Factorization, please solve quadratic equations by Factorization.

Introduction to knowing your maths learner, INTRODUCTION : The other day I...

INTRODUCTION : The other day I overheard 6-year-old Ahmed explaining to his older sister about why swallowing the seeds of an orange is harmful. He said, "The seed will become a p

Green function, greens function for x''''=0, x(1)=0, x''(0)+x''(1)=0 is G(t...

greens function for x''''=0, x(1)=0, x''(0)+x''(1)=0 is G(t,s)= {1-s for t or equal to s

Maclaurin series - sequences and series, Maclaurin Series Before w...

Maclaurin Series Before working any illustrations of Taylor Series the first requirement is to address the assumption that a Taylor Series will in fact exist for a specifi

Find the ratio of line segment, Find the ratio in which the line segment jo...

Find the ratio in which the line segment joining A(6,5) and B(4,-3) is divided by the line y=2           (Ans:3:5) Ans :   Let the ratio be k:1 x = 4 k + 6/ k +1 y

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