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

How much does kristen have left after the money is taken out, Kristen earns...

Kristen earns $550 each week after taxes. She deposits 10% of her income in a savings account and 7% in a retirement fund. How much does Kristen have left after the money is taken

Convex rectilinear figure, the sum of the interior angles of a convex recti...

the sum of the interior angles of a convex rectilinear figure is equal to sum of the exterior angles. then the number of sides is

Combined mean and standard deviation, Combined Mean And Standard Deviation ...

Combined Mean And Standard Deviation Occasionally we may need to combine 2 or more samples say A and B. Therefore it is essential to identify the new mean and the new standard

Fraction word problems, Alan had 6 books. He read 1/3 of books last week. ...

Alan had 6 books. He read 1/3 of books last week. How many books did Alan read last week?

Matrices, det(adj A)for 1*1 matrix

det(adj A)for 1*1 matrix

Write first-order formulas over the relational symbols, Consider the unary ...

Consider the unary relational symbols P and L, and the binary relational symbol On, where P(a) and I(a) encode that a is a point and a (straight) line in the 2-dimensional space, r

Calculate the area of rectangle , Calculate the area of RECTANGLE ? Th...

Calculate the area of RECTANGLE ? The area of a rectangle is the amount of space taken up by a rectangle, which is a two-dimensional shape. You find the area (A) of a recta

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