My Allergy to the Natural Logarithm

For some reason that I don’t know yet, one needs to understand the natural logarithm to calculate interest rates.

Back in high school, I didn’t want to study logarithms, seeing any practical application in life. I was wrong! They are fundamental in continuously compounding interest by using the formula below.

Continuous Compounding

Luckily, I’ve found a brilliant book entitled “Attacking Problems in Logarithms & Exponential Functions” written by David S. Kahn, which explains what e is.

e

The problem is you still don’t know how to connect the above two formulas, as the latter formula does not have the term for interest rate or for the time period. In the end, I’ve found this great website, which explains it all.

http://oto-suu.seesaa.net/article/291512417.html

Although this website is in Japanese, you can easily follow the logic by looking at the series of equations.

Learning is fun when you can logically connect things in your brain

 

Kimoto Financial Translations

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