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

What are factors, What are Factors? When you multiply several numbers t...

What are Factors? When you multiply several numbers together, (4 x 5 x 3), the numbers (4, 5, and 3) being multiplied are called factors. The result of the multiplying th

The perimeter of a rectangle is 104 inches find out width, The perimeter of...

The perimeter of a rectangle is 104 inches. The width is 6 inches less than 3 times the length. Find out the width of the rectangle. Let l = the length of the rectangle and let

Euilibrium, What is partial market equilibrium

What is partial market equilibrium

What is perfect squares, What is Perfect Squares ? Any number that can ...

What is Perfect Squares ? Any number that can be written as an integer to the power of two is called a perfect square. For example, 4 can be written as 2 2 4 is a "perfect sq

Probability, If a school has lockers with 50 numbers on each co...

If a school has lockers with 50 numbers on each combination lock, how many possible combinations using three numbers are there.

What is factorial, Q. What is Factorial? A factorial is a number with a...

Q. What is Factorial? A factorial is a number with a factorial sign, !, after it. 5! is read "five factorial." 3! is read "three factorial." The factorial of a natural

How much is invested at 8% if the total amount of interest, Kevin invested ...

Kevin invested $4,000 in an account which earns 6% interest per year and $x in a different account that earns 8% interest per year. How much is invested at 8% if the total amount o

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