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

Standard deviation, 2.When investigating times required for drive-through s...

2.When investigating times required for drive-through service, the following results (in seconds) were obtained. Find the range, variance, and standard deviation for each of the tw

The point which divides a gven line - segment externally, The point which d...

The point which divides a gven line - segment externally: Construction : i )Draw BX making an actue angle at B. ii) Starting from B mark three equal points on BX as sh

Pi, is that rational or irrational number

is that rational or irrational number

Decision trees and bayes theory, Decision Trees And Bayes Theory This m...

Decision Trees And Bayes Theory This makes an application of Bayes' Theorem to resolve typical decision problems. It is examined a lot so it is significant to clearly understan

Curve tracing, How we calculate region for curve tracing

How we calculate region for curve tracing

Adding equally sized groups-prerequisites for multiplication, Adding Equall...

Adding Equally Sized Groups:  Once children have had enough practice of making groups of equal size, you can ask them to add some of these equal groups. They can now begin to atte

Find the largest clique, Generate G(1000,1/2) and find the largest clique ...

Generate G(1000,1/2) and find the largest clique you can.  A clique is a complete sub graph, that is, a set of vertices each pair of which is connected by an edge.

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