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

6thgrade, do you have 3 digit and 4 digit number problem

do you have 3 digit and 4 digit number problem

Simplified radical form, If we "break up" the root into the total of two pi...

If we "break up" the root into the total of two pieces clearly we get different answers. Simplified radical form: We will simplify radicals shortly so we have to next

Word problems, A patient will receive hemodialysis for 2.5 hours. The amoun...

A patient will receive hemodialysis for 2.5 hours. The amount of fluid removed per hour is 1.4 liters. The total amount removed in liters, will be

Example of normal distribution, The mathematics results of 20 first-year un...

The mathematics results of 20 first-year university students are given, together with their results of their performances in the year 12 semester Test and Final Assignment:

Determine if the three vectors lie in similar plane or not, Determine if th...

Determine if the three vectors a → = (1, 4, -7), b → = (2, -1, 4) and c → = (0, -9, 18) lie in similar plane or not. Solution Thus, as we noted prior to this example al

Find the volume of water left in the cylindrical tub, A solid is in the for...

A solid is in the form of a right circular cone mounted on a hemisphere. The radius of the hemisphere is 3.5 cm and the height of the cone is 4 cm. The solid is placed in a cylindr

Determine the matrix that performs a horizontal compression, (a) Determine ...

(a) Determine the matrix that first rotates a two-dimensional vector 180° anticlockwise, and then per- forms a horizontal compression of the resulting vector by a factor 1/2 (leavi

Find out the next number 320, Find out the next number in the subsequent pa...

Find out the next number in the subsequent pattern. 320, 160, 80, 40, . . . Each number is divided by 2 to find out the next number; 40 ÷ 2 = 20. Twenty is the next number.

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