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

Marginal cost & cost function, Marginal cost & cost function  The cost ...

Marginal cost & cost function  The cost to produce an additional item is called the marginal cost and as we've illustrated in the above example the marginal cost is approxima

Statistics, The winning team''s score in 21 high school basketball games wa...

The winning team''s score in 21 high school basketball games was recorded. If the sample mean is 54.3 points and the sample standard deviation is 11.0 points, find the 90% confiden

Engg maths, How to get assignment to solve and earn money

How to get assignment to solve and earn money

An initial species population , An initial species population is y(0) = 300...

An initial species population is y(0) = 3000. At t=0 the population starts to grow exponentially with a doubling time of 2 years. Mark the only correct statement: a)    The per

Partial differential equations, I need expert who can solve 10 set of PDE w...

I need expert who can solve 10 set of PDE with constant of integration.

Non linear relationships, Non Linear Relationships If the correlation ...

Non Linear Relationships If the correlation coefficient and the scatter diagram do not indicate linear relationship, then the relationship may be nonlinear. Two such relations

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