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

Determine the tangent line to f ( x ) = 15 - 2x2 at x = 1, Determine the t...

Determine the tangent line to f ( x ) = 15 - 2x 2   at x = 1. Solution : We know from algebra that to determine the equation of a line we require either two points onto the li

Determine the relative global error, Consider the differential equation giv...

Consider the differential equation give by y′ = -10(y - sin t) (a) Derive by hand exact solution that satis?es the initial condition y(0) = 1. (b) Numerically obtain the s

Theory of indices, In algebra knowing that 2 3 = 8 is not sufficient...

In algebra knowing that 2 3 = 8 is not sufficient. Equally important to know is what would be the result if quantities like 2 3 . 2 -4 . 2 6 or  3 7 / 3 2

What is deductive reasoning, What is Deductive Reasoning ? Geometry is...

What is Deductive Reasoning ? Geometry is based on a deductive structure -- a system of thought in which conclusions are justified by means of previously assumed or proved sta

Write first-order formulas over the relational symbols, Consider the unary ...

Consider the unary relational symbols P and L, and the binary relational symbol On, where P(a) and I(a) encode that a is a point and a (straight) line in the 2-dimensional space, r

Find fourier series, Question: Find Fourier series for the periodic fun...

Question: Find Fourier series for the periodic function of period 2 π,defined by      f(x) = x 4 ,  - π ≤ x ≤ π

Arithmetic progression., 1.If a+b=2b and ab+cd+ad=3bc,prove that a,b,c,d ar...

1.If a+b=2b and ab+cd+ad=3bc,prove that a,b,c,d are in A.P 2.The nth term of an A.P is an+b.Find the sum of the series upto n terms.

Scaling and translation for equations, Q. Scaling and translation for equat...

Q. Scaling and translation for equations? Ans. If you have an equation in the form y= f(x) (if you're not familiar with functions, that just means having "y" on the left s

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