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

Percentages, how to remember the formulas of this topic

how to remember the formulas of this topic

Conic-section , How will you find the vertex of a parabola given in 2nd de...

How will you find the vertex of a parabola given in 2nd degree form (the axis of parabola is not parallel to coordinate axes)? Ans) Write the equation in type of standard form.

Bricklayer estimates 6.5 how many bricks will he required, A bricklayer est...

A bricklayer estimates that he requires 6.5 bricks per square foot. He needs to lay a patio that will be 110 square feet. How many bricks will he required? Multiply 6.5 by 110;

Properties of logarithms, Properties of Logarithms 1. log a x...

Properties of Logarithms 1. log a xy = log a x + log a y 2.  = log a x - log a y 3. log a x n   = n log

Show trigonometric functions on a graph, Q. Show Trigonometric Functions on...

Q. Show Trigonometric Functions on a Graph? Ans. By discussing the trig functions with respect to an angle in a right-angle triangle, we have only considered angles betwee

Distance traveled, a) Determine the distance traveled among t = 0 and  t =∏...

a) Determine the distance traveled among t = 0 and  t =∏/2 by a particle P(x, y) whose position at time t is given by Also check your result geometrically.  (5) b) D

Geometric progression (g.p.), Learning geometric progression ...

Learning geometric progression vis-á-vis arithmetic progression should make it easier. In geometric progression also we denote the first t

Find the evaluation of angle, In parallelogram ABCD, ∠A = 5x + 2 and ∠C = 6...

In parallelogram ABCD, ∠A = 5x + 2 and ∠C = 6x - 4. Find the evaluation of ∠A. a. 32° b. 6° c. 84.7° d. 44° a. Opposite angles of a parallelogram are same in measu

Two even digits , Find the number of six-digit positive integers that can b...

Find the number of six-digit positive integers that can be formed using the digits 1,2, 3, 4, and 5 (every of which may be repeated) if the number must start with two even digits 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