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

Graphing , what effect is the constant in an equation have on an graph

what effect is the constant in an equation have on an graph

Find out the greatest common factor, Find out the Greatest Common Factor? ...

Find out the Greatest Common Factor? The largest number that is a common factor of two numbers (that is, both numbers share the same factor) is called the greatest common facto

Indices, 16 raised to the power x eqaual to x raised to the power 2. find x...

16 raised to the power x eqaual to x raised to the power 2. find x

Divison, what is 24 diveded by 3

what is 24 diveded by 3

A jeweler has bars of 18-carat gold , A jeweler has bars of 18-carat gold a...

A jeweler has bars of 18-carat gold and 12-carat gold. How much of every melted together to obtain a bar of 16-carat gold, weighing 120 gm ? It is given that pure gold is 24 carat.

Differential Equations, Find the normalized differential equation which has...

Find the normalized differential equation which has { x, xe^x } as its fundamental set

Example of the commutative property of addition, Tori was asked to provide ...

Tori was asked to provide an example of the commutative property of addition. Which of the subsequent choices would be correct? Using the simple interest formula Interest = pr

Alegbra, what iz the value of x if y=56

what iz the value of x if y=56

Permutation, A telephone dialled is numbered 0to9. if 0is dialled first the...

A telephone dialled is numbered 0to9. if 0is dialled first the caller is connected to the international exchange system.find the number of local calls that can be rung if a local n

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