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

Unitary method, what is history of Unitary method

what is history of Unitary method

Standard deviation, Certain model of new home distributed with a mean of $1...

Certain model of new home distributed with a mean of $150,000. Find percentage of buyers who paid between $150,000-155,000 if standard deviation is $1800.

.fractions, what is the difference between North America''s part of the tot...

what is the difference between North America''s part of the total population and Africa''s part

Focal chord of the parabola, show that the circle described on any focal c...

show that the circle described on any focal chord of the parabola touches the directrix

Example of regression equation, Example of Regression Equation An inve...

Example of Regression Equation An investment company advertised the sale of pieces of land at different prices. The given table shows the pieces of land their costs and acreag

The limit, The Limit : In the earlier section we looked at some problems ...

The Limit : In the earlier section we looked at some problems & in both problems we had a function (slope in the tangent problem case & average rate of change in the rate of chan

One tailed test, One Tailed Test It is a test where the alternative hy...

One Tailed Test It is a test where the alternative hypothesis (H 1 :) is only concerned along with one of the tails of the distribution for illustration, to test a business co

Find how much women prefer a job outside of the home, According to a Gallup...

According to a Gallup poll 51% of US women prefer to have a job outside of the home. What is the chance that a survey of 200 women would find that 45% or less of the respondants

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