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
Investment of accumulated income The income accumulations must be invested from time to time and the investments earmarked as being on Accumulations Account. The income aris

The discount rate used must normally reflect the weighted average cost of equity and debt taking into account the systematic risk of the investment. A company's weighted average co

examine the resemblance between Artificial intelligence and neural networks

1. You (Exchange) have just filled an order and notified involved traders of their fills. Next you must tell the world about this trade. Suppose you flip a coin. You flip a coin

Company X is presumably doing well. The corporation's balance sheet last September 31 can be summarized as follows: Total Assets

Q. What is Capitalized Interest? Capitalized Interest - INTEREST cost incurred during time required to bring an ASSET tothe condition and location for its intended use and incl

Real estate depreciated under MACRS rules is subject to cost recovery using a mid-year convention. Mike converted his personal residence (acquired in 2001) to rental property th

Fund flow Math problem and solution.

Q. What is Taxation and capital allowances? The suppositions made regarding taxation should be investigated. The tax rate has-been supposed to be constant when there may be dif

Arnot International's bonds have a present market price of $1,250. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may