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

Sketch the graph, Sketch the graph of                          y = ( x -...

Sketch the graph of                          y = ( x -1) 2  - 4 . Solution Now, it is a parabola .Though, we haven't gotten that far yet and thus we will have to select

Find the solution to initial value problem, Illustration:   Find the soluti...

Illustration:   Find the solution to the subsequent IVP. ty' + 2y = t 2 - t + 1,      y(1) = ½ Solution : Initially divide via the t to find the differential equation in

Write algorithm for the multiplication of a 3-digit number, E1) Why do we s...

E1) Why do we shift the place by one, of the result in the second row of the calculation, when we multiply, say, 35 by 237 E2) Write down the algorithm for the multiplication of

Calculus online, need help completing my online text. can provide login det...

need help completing my online text. can provide login details

Variation of parameters, In the previous section we looked at the method of...

In the previous section we looked at the method of undetermined coefficients for getting a particular solution to p (t) y′′ + q (t) y′ + r (t) y = g (t)    .....................

Decision theory, DECISION THEORY People constantly make decision...

DECISION THEORY People constantly make decisions in their private lives as well as in their work. Some decisions are qualitative in terms of their implications and signi

Determine the relation is partially ordered, Determine if the relation repr...

Determine if the relation represented by the following Boolean matrix is partially ordered. Ans: Let the following relation R is defined on set A = {x, y, z}. To test if t

Decimals, 2.46825141458*1456814314.446825558556

2.46825141458*1456814314.446825558556

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