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

Stages of multiplication from the beginning, What is our aim when teaching ...

What is our aim when teaching children multiplication? Firstly they should be able to judge which situations they need to multiply in, and the numbers that are to be multiplied sec

Probability and statistics, f Y is a discrete random variable with expected...

f Y is a discrete random variable with expected value E[Y ] = µ and if X = a + bY , prove that Var (X) = b2Var (Y ) .

prove area of rhombus on hypotenuse right-angled triangle, Prove that the ...

Prove that the area of a rhombus on the hypotenuse of a right-angled triangle, with one of the angles as 60o, is equal to the sum of the areas of rhombuses with one of their angles

Determinants, can anyone solve this assigment: D=lsqrt(3x-5) sqrt(2x)l ...

can anyone solve this assigment: D=lsqrt(3x-5) sqrt(2x)l =3 l -1 1 l

prove that x = 2h/3, A vertical post stands on a horizontal plane.  The an...

A vertical post stands on a horizontal plane.  The angle of elevation of the top is 60 o and that of a point x metre be the height of the post, then prove that x = 2 h/3 .

Process for solving linear equations, 1. If the equation has any fractions ...

1. If the equation has any fractions employ the least common denominator to apparent the fractions. We will do this through multiplying both sides of the equation by the LCD. Al

Distinct eigenvalues –system solving, DISTINCT EIGENVALUES -SYSTEM SOLVING ...

DISTINCT EIGENVALUES -SYSTEM SOLVING : E xample Solve the following IVP. Solution : Therefore, the first thing that we must to do that is, get the eigenvalues

What is the new cost of the pants, A pair of pants costs $24. The cost was ...

A pair of pants costs $24. The cost was decreased by 8%. What is the new cost of the pants? If the cost of the pants is decreased by 8%, the cost of the pants is 92 percent of

What is larry''s salary after the raise, Larry earned $32,000 per year. The...

Larry earned $32,000 per year. Then he received a (3)1/4% rise. What is Larry's salary after the raise? If Larry earns a (3) 1/4 % (or 3.25%) raise, he will earn 103.25% of his

Launching of a new product, Launching a new product (Blackberry Cube) Analy...

Launching a new product (Blackberry Cube) Analysis (target market) Product features Promotions and advertisement sample design (location)

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