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

Triple integral transformed, An elliptical galaxy has gravitational boundar...

An elliptical galaxy has gravitational boundaries defiend by 9x 2 +16y 2 +144z 2 =144. A black hole at the center of the galaxy is interacting with dark matter producing a radiatio

Matric, fgdg ggghfr hhrhfrf hfrrg jhj hjgg dear friend ghr tu vgu jyyiu ui ...

fgdg ggghfr hhrhfrf hfrrg jhj hjgg dear friend ghr tu vgu jyyiu ui u huik bgyuiiyts husk

Adding fractions with the same denominator, Q. Adding Fractions with the Sa...

Q. Adding Fractions with the Same Denominator? Adding fractions with the same denominator is easy- you add the numerators (the tops), and you leave the denominator alone!

If she remains going at similar rate how long will it take, Susan traveled ...

Susan traveled 114 miles in 2 hours. If she remains going at the similar rate, how long will it take her to go the remaining 285 miles of her trip? There is a 1 in 6 chance of

Shares and dividends, how to see shares and dividends of a company and are ...

how to see shares and dividends of a company and are they seen day wise?

Stratified sampling, Stratified sampling In stratified sampling case t...

Stratified sampling In stratified sampling case the population is divided into groups in such a way that units in each group are as same as possible in a process called strati

Purely imaginary number, It is totally possible that a or b could be zero a...

It is totally possible that a or b could be zero and thus in 16 i the real part is zero.  While the real part is zero we frequently will call the complex numbers a purely imaginar

Daily revenue for next 30 days, Owner of a computer repair shop has daily r...

Owner of a computer repair shop has daily revenue with mean $7200 and SD $1200 Daily revenue for next 30 days will be monitored. What is probability that daily revenue for those 30

How to left shifts and right shifts a graph, Q. How to Left shifts and righ...

Q. How to Left shifts and right shifts a graph? Ans. When you're translating (shifting) a graph, it's easy to get subtracting and adding mixed up. It seems counter-intuiti

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