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

Problem solving sequence: the operations, marianne took $100.00 to a store ...

marianne took $100.00 to a store that was holding a no-tax sale. she bought a shirt for $24.99, sandals for $18.50, shorts for $16.49, and a beach bag for $21.69. how much did she

Operations and properties, use an expression to write an expression with fi...

use an expression to write an expression with five 3s that has a value of 0

What is the net surface area to be painted, You are painting the surface of...

You are painting the surface of a silo that has a diameter of 16 ft and height of 50 ft. What is the net surface area to be painted? Consider the top of the silo is  1/2 a sphere

Probability, joey asked 30 randomly selected students if they drank milk, j...

joey asked 30 randomly selected students if they drank milk, juice, or bottled water with their lunch. He found that 9 drank milk, 16 drank juice, and 5 drank bottled water. If the

Basic concepts of second order differential equations, In this section we w...

In this section we will be looking exclusively at linear second order differential equations. The most common linear second order differential equation is in the type.  p (t ) y

The blood pressure over two heart beats, At rest, the human heart beats onc...

At rest, the human heart beats once every second. At the strongest part of the beat, a person's blood pressure peaks at 120mmHg. At the most relaxed part of the beat, a person's bl

3, LAST COST METHOD

LAST COST METHOD

Assumptions and application of t distribution, Assumptions and Application ...

Assumptions and Application of T Distribution Assumptions of t distribution 1. The sample observations are random 2. Samples are drawn from general distribution 3.

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