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

The bionomial theorem for rational index, use the bionomial theorem to expa...

use the bionomial theorem to expand x+2/(2-X)(WHOLE SQUARE 2)

Are parrellel meet at infinity?, no the parallel lines do not meet at infin...

no the parallel lines do not meet at infinity because the parallel lines never intersect each other even at infinity.if the intersect then it is called perpendicuar lines

Example of hcf, Example  Find the Highest Common Factor of 54, 72...

Example  Find the Highest Common Factor of 54, 72 and 150. First we consider 54 and 72. The HCF for these two quantities is calculated as follows:

Estimate how much did the budget increase, Previous year's budget was 12.5 ...

Previous year's budget was 12.5 million dollars. This year's budget is 14.1 million dollars. How much did the budget increase? Last year's budget must be subtracted from this y

Objectives of helping children learn mathematics, Objectives After stud...

Objectives After studying this leaarn maths; you should be able to explain why a teacher needs to know the level of development of hi; her learners; identify the way

Sum of a number of terms in a.p., We know that the terms in an ...

We know that the terms in an A.P. are given by a, a + d, a + 2d, a + 3d, ........ a + (n - 2)d, a + (n -  1)d The sum of all t

MATH HONORS, HOW DO YOU DO BAR DIAGRAMS ANDESTIMATE IT WITH PERCENTS

HOW DO YOU DO BAR DIAGRAMS ANDESTIMATE IT WITH PERCENTS

Range, identify the range of h(x)=2x+1

identify the range of h(x)=2x+1

Ineqaulites, how to work out inequalities with negative signs?

how to work out inequalities with negative signs?

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