Example of continuous compounding, Financial Accounting

Determine the future value of Rs.1000 compounded continuously for 5 year on the interest rate of 12 percent per year and contrast it along with annual compounding.

 Solution

FV=5 = PVeN(APR)

= 1000 * 2.71828

= 1000 * 2.71828.60

= 1000 * 1.82212

FV=5 = PV (1 + k)n

= 1000 (1 + .12)5

= 1000 (1.7623)

= 1762.3

From this illustration you can very well notice the effects of extreme frequency of compounding.

until now in our discussion we have supposed that the interest rate is going to stay the same over the life of the investment, although now a days we are witnessing an raised volatility in interest rates as a effect of that the financial instruments are designed in a manner that interest rates are benchmarked to a specific variable and along with the change in which variable the interest rates also change consequently.

In that case the Future Value is calculated by this equation:

FVn = PV(1 + k1 ) (1 + k2 ) (1 + k3 ) + ... (1 + kn )

Here kn is the interest rate for period n.

Posted Date: 4/9/2013 2:31:26 AM | Location : United States







Related Discussions:- Example of continuous compounding, Assignment Help, Ask Question on Example of continuous compounding, Get Answer, Expert's Help, Example of continuous compounding Discussions

Write discussion on Example of continuous compounding
Your posts are moderated
Related Questions
Proposed dividends by subsidiary company If the subsidiary company has proposed some dividends appearing under current liabilities then the dividends are payable to the holding c

Steps in preparing the consolidated balance sheet Step 1 : Prepare the 3 important accounts i.e. cost of control to determine goodwill Group retained profits Mino

Q. What do you mean by Issuer? Issuer - This term means an issuer, securities of which are registered under Section 12 of Securities Exchange Act of 1934, or that is essential

You have the following limited information upon which to base your decision as to which is the better of two alternative funding arrangements: Alternative 1 is to arrange fun

Table on subsequent page lists 21 ratios being calculated by the Bombay Stock Exchange. Tick the board class to that each of the 21 ratios belongs to the blank columns of the Table

i need help with my project

IFRS guidelines IFRSs Gives the guideline on the content and the accounting statements of certain events and transactions in the financial statements. The following IFRSs are r

explain the terms recording,classifying,summarizing and communicating

Book :Accounting Research :Tools and Strategies • Facts: • Sony is a Japanese multinational company that decided to expand its entertainment business in the United States. Sony

tyoes of assets