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

Elps in maths, 25 cookies have to be divided equally among 4 children.hw ca...

25 cookies have to be divided equally among 4 children.hw can we use elps to answer this question?

Trigonmetry, On your geometry test you have two triangles: ?ABC and ?MNO. Y...

On your geometry test you have two triangles: ?ABC and ?MNO. You are told that ?A ? ? M and that ?B ? ? N. Which statement is also true?

Random variable, RANDOM VARIABLE A variable which assumes differ...

RANDOM VARIABLE A variable which assumes different numerical values as a result of random experiments or random occurrences is known as a random variable. The rainfal

Proper and improper fractions, Proper and Improper Fractions: Exampl...

Proper and Improper Fractions: Example: 3/8 proper fraction 8/3 improper fraction 3/3 improper fraction Here an improper fraction expressed as the sum of an in

Union operations using union by weight, Show the result of the following se...

Show the result of the following sequence of UNION operations using union-by-weight with the following assumptions Unions are performed on the representatives on the sets th

Sqares, Recently I had an insight regarding the difference between squares ...

Recently I had an insight regarding the difference between squares of sequential whole numbers and the sum of those two whole numbers. I quickly realized the following: x + (x+1)

Circls, in a given figure a,b,c and d are points on a circle such that ABC ...

in a given figure a,b,c and d are points on a circle such that ABC =40 and DAB= 60 find the measure of DBA

Trignometery., using the formula sin A =under root 1+ cos2A /2 . find value...

using the formula sin A =under root 1+ cos2A /2 . find value of 30 degree, it is being given that cos 60 degree =1/2.

6, 200000+500

200000+500

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