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

Number system, NATURAL NUMBERS The numbers 1, 2, 3, 4.... Are called as...

NATURAL NUMBERS The numbers 1, 2, 3, 4.... Are called as natural numbers, their set is shown by N. Hence N = {1, 2, 3, 4, 5....} WHOLE NUMBERS The numbers 0, 1, 2, 3, 4

Percentage, By selling a violin for $4950, giving a 10% discount on the mar...

By selling a violin for $4950, giving a 10% discount on the marked price, a trader gained $950 on his investment, Find, Cost price.

Factoring quadratics of the form x2 + bx + c, Factoring quadratics of the f...

Factoring quadratics of the form x 2 + bx + c ? This tutorial will help you factor quadratics that look something like this: x 2 + 7x + 12 (Positive coefficients; no lea

Example for articulate reasons and construct arguments, A Class 4 teacher w...

A Class 4 teacher was going to teach her class fractions. At the beginning of the term she asked the children, "If you had three chocolates, and wanted to divide them equally among

Geometry, geometry fbw = 128 saf= 104 what is rfd

geometry fbw = 128 saf= 104 what is rfd

Area of an ellipse, You know the experation for the area of a circle of rad...

You know the experation for the area of a circle of radius R. It is Pi*R 2 . But what about the formula for the area of an ellipse of semi-minor axis of length A and semi-major

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