AuthorTopic: Using TI BII plus for continuous compounding
syug
@2014-09-12 17:24:00
Using TI BII Plus for continuous compunding

Can anyone please explain how to use the calculator to find continous compunding? Its mannual doesn’t explain what inputs I need to put.

Here is the question that is from CFAI:

Q: For liquidity purpose, a client keeps $100,000 in a bank account. The bank qoutes a stated annual interest rate 7 percent. The bank’s service representative expains that the stated rate is the rate one would earn if one were to cash out rather than invest the interest payments. How much will your client have in his account at the end of one year, assuming no additions or wthdrawals?

So far what I did was with the calculator:

PV = -100,000

and then I don’t know what to do. The answer based on the book is $107,250.82

Thank you very much for your time
Omachoko
@2014-09-13 04:55:42
For continuous compounding you need to use the exponential function: e^x. (Think of the “x” as a superscript; I can’t do an actual superscript in my post here.)

So:

7%, e^x, gives 1.0725082

× 100,000, gives 107,250.82.

That’s it.

To do the reverse – to get the continuously compounded rate – you use ln(x) (it might be capitalized: LN(x)).

If $100,000 grows to $105,000 in one year, what’s the continuously compounded rate?

$105,000 ÷ $100,000 = 1.05.

1.05, ln(x), gives 0.04879, or 4.897%.

CFA Discussion Topic: Using TI BII plus for continuous compounding

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