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

Knowing your learner, Here, we have tried to present some of the different ...

Here, we have tried to present some of the different thinking and learning processes of preschool and primary school children, in the context of mathematics learning. We have speci

Variation, If p=10 when q=2,find p when q=5

If p=10 when q=2,find p when q=5

Evaluate the integral - trig substitutions, Example of Trig Substitutions ...

Example of Trig Substitutions Evaluate the subsequent integral. ∫ √((25x 2 - 4) / x) (dx) Solution In this type of case the substitution u = 25x 2 - 4 will not wo

Relationship between the graph and inverse function, Interesting relationsh...

Interesting relationship between the graph of a function and the graph of its inverse : There is one last topic that we have to address quickly before we leave this section.  Ther

Trigonometric ratios, to difine trigonometric ratios of an angle,is it nece...

to difine trigonometric ratios of an angle,is it necessary that the initial ray of the angle must be positive x-axis?

Example of learning to count, A parent shows his child four pencils. He pla...

A parent shows his child four pencils. He places them in a row in front of her and says "one" as he points to the first pencil, "two" as he points to the second one, "three" as he

What is the maximum volume of rectangular box, 1. A rectangular piece of ca...

1. A rectangular piece of cardboard measuring 26 inches by 42 inches is to be made into a box with an open top by cutting equal size squares from each comer and folding up the side

Theorem, Theorem, from Definition of Derivative  If f(x) is differenti...

Theorem, from Definition of Derivative  If f(x) is differentiable at x = a then f(x) is continuous at x =a. Proof : Since f(x) is differentiable at x = a we know, f'(a

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