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

Fractions, #how do I add fractions?

#how do I add fractions?

Define period, Q. Define Period, Amplitude and Phase Shift? Ans. P...

Q. Define Period, Amplitude and Phase Shift? Ans. Period, amplitude and phase shift are used when describing a sinusoidal curve The period of a function is the smallest

Compound interest, principal=2000 rate=5% time=2 years find compound intere...

principal=2000 rate=5% time=2 years find compound interest

factorial, why zero factorial is equal to on

why zero factorial is equal to one

Comparing, compare 643,251 633,512 and 633.893 the answer is 633.512 what i...

compare 643,251 633,512 and 633.893 the answer is 633.512 what is the question

Fractions, a boy is six months old his sister was given birth to three mont...

a boy is six months old his sister was given birth to three month after him. if their cousin is 0.33years old, arrange their ages in ascending order

Rate -categories of multiplication, Rate - when we know how many objects...

Rate - when we know how many objects are in a set, and need to find out the total number in several copies of that set. (e.g., if a child uses 4 copybooks in a year, how many co

Introduction to mathematics, We know that one has to deal with ...

We know that one has to deal with numbers in day-to-day life irrespective of his inclination and field of work. Also one cannot refute the fact

Help me, How should Shoppers’ Stop develop its demand forecasts?

How should Shoppers’ Stop develop its demand forecasts?

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