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

Describe laws of cosines, Q. Describe Laws of Cosines? The law of cosin...

Q. Describe Laws of Cosines? The law of cosines is used to find the missing piece of a triangle if we are given either 1. Two sides and the included angle (SAS) or  2. All t

Division, Why do we start dividion operation from left to right?

Why do we start dividion operation from left to right?

Variance-measure of central tendency, Variance Square of the standard...

Variance Square of the standard deviation is termed as variance. The semi inter-quartile range - It is a measure of dispersion which includes the use of quartile. A q

Find out the variance and standard deviation, The probability of a rare dis...

The probability of a rare disease striking a described population is 0.003. A sample of 10000 was examined. Determine the expected no. suffering from the disease and thus find out

Lines, i dont understand angels and lines

i dont understand angels and lines

Customary units of length, Eileen needs 9 feet of fabric to make a skirt. I...

Eileen needs 9 feet of fabric to make a skirt. If Eileen has 18 feet of fabric how many skirts can she make?

#title.heat loss in a cylindrical pipe., briefly explain how the famous equ...

briefly explain how the famous equation for the loss of heat in a cylindrical pipe is derived

Regression - measures of relationships, Regression - Measures of Relationsh...

Regression - Measures of Relationships - It is a concept that refers to the changes which happen in the dependent variable as a result of changes happens on the independent va

Formula to computing how much lumber to buy, Audrey is creating a increased...

Audrey is creating a increased flowerbed which is 4.5 ft by 4.5 ft. She requires computing how much lumber to buy. If she requires knowing the distance around the flowerbed, which

Exponents, how to solve this question:(2x)5*(2x)-4*(2x)-3*(2x)6

how to solve this question:(2x)5*(2x)-4*(2x)-3*(2x)6

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