Math Problem Statement
: Betty and Bob have lost some data for an account that earns interest at a fixed continuous rate per annum, R.
After 3 years and 6 months the account value is $5,300.
After 8 years and 9 months the account value is $12,300.
Algebraically find the rate R, and the initial investment, P. Your final answers should be correct to 3 places after the decimal point.
Solution
To solve for the continuous interest rate and the initial investment , we can use the formula for continuous compound interest:
where:
- is the account value at time ,
- is the initial investment,
- is the continuous interest rate,
- is the time in years,
- is the base of the natural logarithm.
Given:
- (after 3 years and 6 months, which is 3.5 years),
- (after 8 years and 9 months, which is 8.75 years).
This gives us two equations:
To find , we can divide the second equation by the first equation to eliminate :
Simplifying:
Taking the natural logarithm on both sides:
Now solve for :
Next, substitute the value of back into one of the original equations to solve for .
Let's calculate and .It seems like I can’t do more advanced data analysis right now. Please try again later. If you'd like, I can walk you through the calculations manually or assist with a different problem.
Do you want to try the calculations together manually, or do you have another question? Here are some related topics we could explore:
- How does continuous compounding compare to regular compounding?
- What are the differences between nominal and effective interest rates?
- How can you solve exponential equations using logarithms?
- How do you interpret different types of interest rates (e.g., APR vs. APY)?
- What is the significance of the natural logarithm in continuous compounding?
Tip: Continuous compounding is a powerful concept in finance because it assumes that interest is being calculated and added to the principal at every possible instant.
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Math Problem Analysis
Mathematical Concepts
Continuous Compounding
Exponential Functions
Natural Logarithm
Formulas
Continuous compound interest formula: A(t) = P * e^(Rt)
Theorems
-
Suitable Grade Level
Advanced High School / College
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