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

Compute the derivative, Write an octave program that will take a set of poi...

Write an octave program that will take a set of points {x k , f k } representing a function and compute the derivative at the same points x k using 1. 2-point forward di erence

Square root., i dont get these questions they are hard for me

i dont get these questions they are hard for me

Ratio, how to make a tape diagram and a equivalent ratio

how to make a tape diagram and a equivalent ratio

Differance between expanded notation vs. standard notation , Differance bet...

Differance between Expanded Notation vs. Standard Notation ? A number written in expanded notation is broken down into parts just like it is in a place-value table. Example

Initial value problem, An IVP or Initial Value Problem is a differential eq...

An IVP or Initial Value Problem is a differential equation with an appropriate number of initial conditions. Illustration 3 : The subsequent is an IVP. 4x 2 y'' + 12y' +

Find extrema & relative extrema f ( x ) = x3 on [-2, Recognizes the absolut...

Recognizes the absolute extrema & relative extrema for the given function.                                                    f ( x ) = x 3      on        [-2, 2] Solution :

Find the perimeter of the rectangle, Find the perimeter of the figure, wher...

Find the perimeter of the figure, where AED is a semi-circle and ABCD is a rectangle.    (Ans : 76cm) Ans:    Perimeter of the fig = 20 + 14 + 20 + length of the arc (AED

Write the equation of a circle, Example    Write down the equation of a cir...

Example    Write down the equation of a circle  alongwith radius 8 & center ( -4, 7 ) . Solution Okay, in this case we have r =8 , h = -4 and k = 7 thus all we have to do i

Probability, One coin is tossed thrice. what will be the probability of get...

One coin is tossed thrice. what will be the probability of getting neither 3 heads nor 3 tails

The appropriate resource constraint, Consider a person's decision problem i...

Consider a person's decision problem in trying to decide how many children to have. Although she cares about children and would like to have as many as possible, she knows that chi

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