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

Right-handed limit, Right-handed limit We say provided we can m...

Right-handed limit We say provided we can make f(x) as close to L as we desire for all x sufficiently close to a and x>a without in fact letting x be a.

In the terms of x, The length of Kara's rectangular patio can be expressed ...

The length of Kara's rectangular patio can be expressed as 2x - 1 and the width can be expressed as x + 6. In the terms of x, what is the area of her patio? Since the area of a

Ploting of mathematical graphs, how can we represent this mathematical equa...

how can we represent this mathematical equation on a graph y=2x-1

Integrals involving quadratics - integration techniques, Integrals Involvin...

Integrals Involving Quadratics To this point we have seen quite some integrals which involve quadratics.  Example of Integrals Involving Quadratics is as follow: ∫ (x / x 2

X and y -intercept, X-intercept  If an intercept crosses the x-axis we ...

X-intercept  If an intercept crosses the x-axis we will call it as x-intercept .  Y-intercept Similar, if an intercept crosses the y-axis we will call it as a y-inter

Stats Combination Questions, A car buyer has a choice of three makes, five ...

A car buyer has a choice of three makes, five body styles, and six colors. How many different choices does the buyer have?

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