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

Listing method, how will you explain the listing method?

how will you explain the listing method?

Permuation and combination, how many words can be formed from letters of wo...

how many words can be formed from letters of word daughter such that each word contain 2vowles and 3consonant

Poisson mathematical properties, Poisson Mathematical Properties 1. Th...

Poisson Mathematical Properties 1. The expected or mean value = np = λ Whereas; n = Sample Size p = Probability of success 2. The variance = np = ? 3. Standard dev

Calculus, Properties of Integration

Properties of Integration

Simplify the boolean function, Simplify the Boolean function: F...

Simplify the Boolean function: F (w,x,y,z) = ∑ (0, 1, 2, 3, 4, 6, 8, 9, 12, 13, 14)  (8)  Ans:   f(w, x, y, z) = ∑(0, 1, 2, 3, 4, 6, 8, 9, 12, 13, 14) The above

Trignometry, Sin3x ? Solution) THE FORMULA IS RIGHT ,SO sin3x=3sin...

Sin3x ? Solution) THE FORMULA IS RIGHT ,SO sin3x=3sinx-4sin 3 x

Area of the equilateral triangle, Area of the equilateral triangle: ...

Area of the equilateral triangle: Given : D, E, F are the mind points of BC, CA, AB. R.T.P. : We have to determine the ratio of the area of of triangle DEF and triangle AB

Why is vector division undefined, Division basically refers to multiplicati...

Division basically refers to multiplication of reciprocal. For example a/b is same as a*1/b or we can say, is same as a*b -1 , which is "a" multiplied to the inverse of "b". There

Laws of set algebra, Laws of Set Algebra From the given Venn diagram w...

Laws of Set Algebra From the given Venn diagram where T is the universal set and A its subset that we can deduce a number of laws as: i. A υ Ø = A ii. A υ T = T

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