Accumulation function

The accumulation function a(t) is a function defined in terms of time t expressing the ratio of the value at time t (future value) and the initial investment (present value). It is used in interest theory.

Thus a(0)=1 and the value at time t is given by:

$A(t)=k\cdot a(t)$.

where the initial investment is k.

Examples:

• simple interest: $a(t)=1+t\cdot i$
• compound interest: $a(t)=(1+i)^{t}$

In the case of a positive rate of return, as in the case of interest, the accumulation function is an increasing function.

Variable rate of return

The logarithmic or continuously compounded return is a function of time defined as follows:

$\delta _{t}={\frac {a'(t)}{a(t)}}\,$

which is the rate of change with time of the natural logarithm of the accumulation function.

Conversely:

$a(t)=e^{\int _{0}^{t}\delta _{u}\,du}$

reducing to

$a(t)=e^{t\delta }$

for constant $\delta$.

The effective annual percentage rate at any time is:

$r(t)=e^{\delta _{t}}-1$

See also

• time value of money