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

Math, Verify Louisville''s formula for y "-y" - y'' + y = 0 in (0, 1) quest...

Verify Louisville''s formula for y "-y" - y'' + y = 0 in (0, 1) question..

Find least number of cables required to connect 100 computer, Find out the ...

Find out the least number of cables required to connect 100 computers to 20 printers to assurance that 20 computers can directly access 20 different printers.  Justify your answer.

Naive regular perturbation of the form, Consider the equation e x 3 + ...

Consider the equation e x 3 + x 2 - x - 6 = 0, e > 0 (1) 1. Apply a naive regular perturbation of the form do derive a three-term approximation to the solutions

Fractions, how do you do fractions mixed numbers and how do you add and sub...

how do you do fractions mixed numbers and how do you add and subtract fractions.

How to multiply two fractions, Q. How to Multiply two Fractions? Multip...

Q. How to Multiply two Fractions? Multiplying fractions is really easy! The rule is: "multiply across"- You multiply the numerators, and you multiply the denominators.

Mechanics, find the composition of the simple harmonic motion of the same p...

find the composition of the simple harmonic motion of the same period in the perpendicular directions

Ms. Smith, How can I use the I=Prt formula to get the interest for this pro...

How can I use the I=Prt formula to get the interest for this problem? A car dealer sells me a car for $16450 with $3,290 down and $339.97 monthly payments for 48 months. What is

Algebra, 1 ream uses 6% of a tree, Estimate the reams of paper used in one ...

1 ream uses 6% of a tree, Estimate the reams of paper used in one month in an office(may be your father, mother or neighbour), hence find the number of trees that need to be cut fo

Substitution rule, Substitution Rule ∫ f ( g ( x )) g′ ( x ) dx = ∫ f (...

Substitution Rule ∫ f ( g ( x )) g′ ( x ) dx = ∫ f (u ) du,     where, u = g ( x ) we can't do the following integrals through general rule. This looks considerably

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