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

What is the area of the court in square feet, A racquetball court is 40 ft ...

A racquetball court is 40 ft through 20 ft. What is the area of the court in square feet? The area of a rectangle is length times width. Thus, the area of the racquetball court

Hours, jeff left hartford at 2:15 pm and arrived in boston at 4:45 pm how l...

jeff left hartford at 2:15 pm and arrived in boston at 4:45 pm how long did the drive take him?

How to converting scientific notation to standard notation , How to Convert...

How to Converting Scientific Notation to Standard Notation ? To change a number in scientific notation to standard notation, move the decimal point the same number of places as

Formula to computing how much lumber to buy, Audrey is creating a increased...

Audrey is creating a increased flowerbed which is 4.5 ft by 4.5 ft. She requires computing how much lumber to buy. If she requires knowing the distance around the flowerbed, which

Example of complex roots, Solve the subsequent IVP. y'' - 4y' + 9y = 0, ...

Solve the subsequent IVP. y'' - 4y' + 9y = 0, y(0) = 0, y'(0) = -8 Solution The characteristic equation for such differential equation is. As:  r 2 - 4r + 9 = 0

How do you find the second minimum spanning tree of a graph, How do you fin...

How do you find the second minimum spanning tree of a graph?  Find the second minimum spanning tree of the following graph.  Ans: The second minimum spanning tree is acq

What is 2^5, What is 2 5 ? 2 5 = 2 ×2 ×2 ×2 ×2 = 32

What is 2 5 ? 2 5 = 2 ×2 ×2 ×2 ×2 = 32

Multiple integrals, how to convert multiple integral into polar form and ch...

how to convert multiple integral into polar form and change the limits of itegration

Correlation and regression, Correlation and Regression Correlation ...

Correlation and Regression Correlation CORRELATION is an important statistical concept which refers to association or interrelationship among variables. The reasons of

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