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

What is the opec, What is the OPEC? - The Organization of the Petroleum Exp...

What is the OPEC? - The Organization of the Petroleum Exporting Countries, a coordination group of petrol producers The Organization for Peace and Economic Cooperation, a German le

MARKET TARGETING STATERGIES, A MANUFACTURING UNIT IS INTERESTED IN DEVELOPI...

A MANUFACTURING UNIT IS INTERESTED IN DEVELOPING A BENEFIT SEGMENTATION OF THE CAMERA MARKET. SUGGEST SOME MAJOR BENEFIT SEGMENT WITH MARKET TARGETING STRATEGIES?

Accumulated amount , $26,000 is spended for two years. In the first year it...

$26,000 is spended for two years. In the first year it gets interest at 8.3% p.a. compounded semi annually. In the same year the rate of interest changes to 7.5% p.a. compounded da

Real analysis, .find lim sup Ek and liminf Ek of Ek=[(-(1/k),1] for k odd a...

.find lim sup Ek and liminf Ek of Ek=[(-(1/k),1] for k odd and liminf Ek=[(-1,(1/k)] for k even

Find the return period in years of the critical event, 1. A drainage system...

1. A drainage system overflows into a river causing pollution when the rainfall falling in an hour exceeds 50 mm. During any given year, the maximum hourly rainfall follows an expo

Simplex table, maximize Z=2x+5y+7z, subject to constraints : 3x+2y+4z =0

maximize Z=2x+5y+7z, subject to constraints : 3x+2y+4z =0

Normal to y=f(x) , If the normal to y=f(x) makes an angle of pie/4 with y-a...

If the normal to y=f(x) makes an angle of pie/4 with y-axis at (1,1) , then f''(x) is eqivalent to? Ans) The normal makes an angle 135 degree with the x axis. also f ''(1)

Boundary value problem, solve the in-homogenous problem where A and b are c...

solve the in-homogenous problem where A and b are constants on 0 ut=uxx+A exp(-bx) u(x,0)=A/b^2(1-exp(-bx)) u(0,t)=0 u(1,t)=-A/b^2 exp(-b)

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