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

Percentage profit and loss, #a grocer buys a box of 200oranges for $25 he s...

#a grocer buys a box of 200oranges for $25 he sells them for 15c caluclate his percentage profit

what are the coordinates of the vertex , Use the graph of y = x2 - 6x  to ...

Use the graph of y = x2 - 6x  to answer the following: a)         Without solving the equation (or factoring), determine the solutions to the equation  x 2 - 6x = 0  usi

Infinity, Are there more rational numbers than integers?#

Are there more rational numbers than integers?#

Calculate the profits per acre strategy, A farmer grows apples on her 600 a...

A farmer grows apples on her 600 acre farm and must cope with occasional infestations of worms. If she refrains from using pesticides, she can get a premium for "organically grown"

Probability and statistics, f Y is a discrete random variable with expected...

f Y is a discrete random variable with expected value E[Y ] = µ and if X = a + bY , prove that Var (X) = b2Var (Y ) .

Properties of definite integral, Properties 1.  ∫ b a f ( x ) dx = -∫ ...

Properties 1.  ∫ b a f ( x ) dx = -∫ b a f ( x ) dx .  We can interchange the limits on any definite integral, all that we have to do is tack a minus sign onto the integral

Determine the range of given algorithm, The division algorithm says that wh...

The division algorithm says that when a is divided by b, a unique quotient and remainder is obtained. For a fixed integer b where b ≥ 2, consider the function f : Z → Z given by f(

Factor Fiction, Ok this is true or false wit a definition. The GCF of a pai...

Ok this is true or false wit a definition. The GCF of a pair of numbers can never be equal to one of the numbers.

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