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

Calculate frequencies for two modes of vibration, A partially loaded passen...

A partially loaded passenger car has a mass of 1600 kg.  It has fully independent suspension in which each front spring has a stiffness of 19.0 kNm -1 and each rear spring has a s

Example of inverse matrix, Determine the inverse of the following matrix, i...

Determine the inverse of the following matrix, if it exists. We first form the new matrix through tacking onto the 3 x 3 identity matrix to this matrix.  It is, We

Area of a hyperbolic wedge, The unit circle will be parametrized by (cosw, ...

The unit circle will be parametrized by (cosw, sinw). Provide a point on it, the region cut out by circle, the x-axis, and the line from the origin to this point has covered area w

Graphing linear equtions, Determine whether each equation is a linear equat...

Determine whether each equation is a linear equation. If yes, write the equation in standard form. y=2x+5

Hierarchical multiple regression, A group of children who lived near a lead...

A group of children who lived near a lead smelter in El Paso, Texas, were identified and their blood levels of lead were measured. An exposed group of 46 children were identified w

Group automorphism, (a) Find an example of groups G, H, K with K  H and H...

(a) Find an example of groups G, H, K with K  H and H G but K G. (b) A subgroup H of G is characteristic if σ(H) ⊆ H for every group automorphism σ of G. Show that eve

Volumes of solids of revolution - method of rings, Volumes of Solids of Rev...

Volumes of Solids of Revolution / Method of Rings In this section we will begin looking at the volume of solid of revolution. We have to first describe just what a solid of rev

Example of negative number, Q. Example of negative number? If you take ...

Q. Example of negative number? If you take an elevator 8 stories  down , what would be the opposite of this? The opposite would be that you take the elevator 8 stories  up .

Subtract, Ask question Minimum 100 words accepted# 1000-101

Ask question Minimum 100 words accepted# 1000-101

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