The Euler number

Saturday, 17 February 18
 Recall: We have defined exponential functions to be those
Recall.
x
of the type x 7! a , where a > 0 is the base.

There is a certain value of the base a which gives rise to an

exponential function that occurs in many applications in
fields such as physics, biology, probability theory. . .

This special value is a number denoted e, and called

the Euler number.

The function x 7! ex is referred to as the natural exponential

function. It is often written as exp(x).

Euler: e t 2,71828182845904523536028

Saturday, 17 February 18
 the theory of interest

Interest rates are usually given on a nominal (or annual) basis. But the
interest is generally compounded during the time period.

Example. Let the interest rate be 5%, with no compounding (simple

interest). Then 100€ in your account at the beginning of the year
becomes 105€ after one year.

100 ! 100 ⇥ (1 + 0.05)

Saturday, 17 February 18
 But if the interest rate is compounded every 6 months, you get 2.5% of
the capital credited to your account every 6 months. (The nominal rate
is still 5%, but now interest is credited after 6 months.)
✓ ◆
0.05
After 6 months your 100 monetary units become 100 ⇥ 1 +
2
After one year you then have
✓ ◆ ✓ ◆ ✓ ◆2
0.05 0.05 0.05
100 ⇥ 1 + ⇥ 1+ = 100 ⇥ 1 +
2 2 2
= 105.0625

So compounding makes saving more interesting...

Saturday, 17 February 18
 Similarly, if the compounding is quarterly or monthly, you will have at the
end of the year
✓ ◆4 ✓ ◆12
0.05 0.05
100 1 + or 100 1 +
4 12

More generally, a nominal interest rate of 100 r compounded n times per

year will multiply the initial capital, after one year, by the factor
✓ ◆n
r
1+
n
What would be the effect of continuous compounding ?
✓ ◆n
r r 0.05
Proposition. lim 1 + = e Remark. e = 1.0513
n!1 n
Set r = 1 to find e t 2,718
Saturday, 17 February 18
 ex

x
Fig. 3. The exponential function

Saturday, 17 February 18