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

Unite Ratet, How does finding the unit rate help make smart decisions?

How does finding the unit rate help make smart decisions?

Calculate the ratio of the areas of three sectors, A circular disc of 6 cm ...

A circular disc of 6 cm radius is divided into three sectors with central angles 1200, 1500,900. What part of the circle is the sector with central angles 1200. Also give the ratio

The point which divides a gven line - segment externally, The point which d...

The point which divides a gven line - segment externally: Construction : i )Draw BX making an actue angle at B. ii) Starting from B mark three equal points on BX as sh

What is pythagorean triples, What is Pythagorean Triples? A set of thre...

What is Pythagorean Triples? A set of three numbers a, b, and c that can satisfy the equation A 2 +b 2 = c 2 , is called a Pythagorean triple. The following is a list of

HELP, WHAT TWO SIX DIDGIT NUMBERS CAN YOU ADD 984,357

WHAT TWO SIX DIDGIT NUMBERS CAN YOU ADD 984,357

Slope, One of the more significant ideas that we'll be discussing in this s...

One of the more significant ideas that we'll be discussing in this section is slope. The slope of a line is a measure of the steepness of any particular line and it can also be uti

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