MAMI Olof

Functions Lecture 4 03 03

Eaters number 9 2.7182818

continuous compounding
cont compounding examples

today textbook Chapter 2.2 p 151 154

Lecturer James Mbewa

 Last time in MAMI Olof
exponential function
f 2 A.ba
manipulating exponents
converting to standard form e.g 2
a
graph of exponential function
exponential growth when b 1
when bet
exponential decay o

plotting different exponentials

ft
domain A so
o
ELR a
K
range A
o range yo
y 70
Euler's number e 2.7182818
Suppose we invest RI in the bank for 1 year at
100 interest compounded m times per year
Fu pv Iti i E tm i n int m Pu l
Itt
if m l Fu R 2 m FV th
if m 12 FV R 2.61 I 2.0
12 2.61303529
if m 365 FU R 2 71 365 2.714567482
1000 2.716923932
if m gets larger and larger 10000 2.718145927
kV Itt gets closer and closer 100000 2.718268237
to a
specific value 2.718281 1000000
10000000
2.718280469
2.718281694
we call this this the limiting value 1000000002.718281786
of
Ctm The limit as
m goes to infinity
This special number is called e Euler's number
e lim tmt 2.7182818285
m s to

It is a transcendental like
number I which
means
without
its decimal expansion goes on forever
repeating
Very useful and convenient in calculus as we
will see later in the course
Continuous Compounding
Defn Continuous compounding is when we let
m the number of compoundings per year
become larger and larger
In the previous case with PV 1 and I 100
we had Fr e What about the more general case
We want to rearrange fr formula to get something
that looks like Itt then make m
large
Mt
FV PU I E t
prat Im
E rt
pull E m
E r

Pv I
E J b's by
set m E

Pratt my't
If we make m large then m will also be large

I th e if m is large

Continuous compounding formula

Fr P Vert

FV t pv ert
PV er
A Pr Cb er
 Example
a) You invest R10000 at Fastrack Savings & Loan, which pays 6% compounded
continuously. Express the balance in your account as a function of the number of years 𝑡,
and calculate the amount of money you will have after 5 years.

FV t P Vent PV 10000 r to 0.06

0Gt
FU Ct 10000 go
amount of after S
money years
0.0665
FV 5 10 ooo e

R 13498.59
 Example cont
b) Your friend has just invested R20000 in Constant Growth Funds, whose stocks are
continuously declining at a rate of 6% per year. How much will her investment be worth
in 5 years?

FV P Vent PV 20 000 r to 0.06

0.06 t
FUCA 20 000 e

her investment will be worth

0.00 5
FV 5 20 000 e
R 14816.36
 Example cont
c) During which year will the value of your investment first surpass that of your friend’s
investment?

FU t 10 000 eo.at

During the 6th year our investment will overtake our

friend's investment

t FU FU
I 10618.37 18835.30
2 11 274.97 17738.41
11 972.17 16705.40
4 12712.49 15732.56
5 13498.59 14 816.36
6 14 333.80 13953.53

FICA FICA
 006 t 0.0Gt
10 000 20 000 e

I
e
off a oat

I e
0.0Gt 0.06 t 5 be g

o 120
I e log b a log b
ort
log t log e
y
log t 0.12 t log e

t
gg g
5.78 years

our investment overtakes during 6th year

Exponential function Alternate form
It is often convenient to express exponential
functions in the form
FGC Aer

Comparing to what we saw yesterday fbc Aba

Flac AG beer 1.06

If o b 1 and exponential
r
growth
if r o oh bet and exponential decay

We will tomorrow how convert

see you might
between these forms
Next time in MAM lol of
a
logarithms
inverse functions
logarithmic function

textbook Chapter 2.3 p 161 169