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 do you mean by transient state, What do you mean by transient state an...

What do you mean by transient state and steady-state queueing systems If the characteristics of a queuing system are independent of time or equivalently if the behaviour of the

probability , An engineer has 200 resistors that he keeps in one box. Resi...

An engineer has 200 resistors that he keeps in one box. Resistors are colored to help their identification, and in this box there are 30 white resistors, 50 black resistors, 80 red

Find out the probability, A speaks truth in 80% of the cases and B speaks t...

A speaks truth in 80% of the cases and B speaks truth in 60% of the cases.  Find out the probability of the cases of which they are possible to contradict each other in stating sim

Determine a particular solution to differential equation, Determine a parti...

Determine a particular solution for the subsequent differential equation. y′′ - 4 y′ -12 y = 3e5t + sin(2t) + te4t Solution This example is the purpose that we've been u

Advantages and disadvantages of decision trees, Advantages of decision tree...

Advantages of decision trees 1. This clearly brings out implicit calculations and assumptions for all to see question and revise 2. This is simple to understand Disadvan

Fraction, 5645.356 turn into fraction

5645.356 turn into fraction

Find a maximum flow and a minimum cut, Use the maximum flow algorithm to fi...

Use the maximum flow algorithm to find a maximum flow and a minimum cut in the given network, where the capacities of arc CF, EC , DE and BD are w = 13, x = 7, y =1, a

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