FinanceLesson 1 of 1 in the course Time Value of Money I: Single Payment Value

Compounding and Factors Affecting Future Value

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

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Summary

This lesson introduces future value and shows how to calculate what a present amount will be worth after one period of earning interest.

Money can earn interest when it is placed in an interest-bearing account or invested. Because of that potential growth, a given amount of money today can become a larger amount in the future.

Future value (FV) is the value of money at a specified future date after it has earned interest or investment returns. Present value (PV) is the amount available today. In a basic single-period setting, future value is the original amount plus the interest earned during the period.

All flashcards

Future value (FV)
The value of money at a specified future date after interest or returns accrue.
Present value (PV)
The amount of money available today.
Compound interest
Interest earned on the original principal and on interest from earlier periods.
Future value interest factor (FVIF)
The multiplier (1+r)n(1+r)^n that converts present value into future value.
Simple interest
Interest calculated only on the original principal.

Quiz questions

  1. What distinguishes compound interest from simple interest?Answer: Compound interest is earned on earlier interest as well as the principal.
  2. Which formula calculates future value over nn periods at rate rr per period?Answer: FV=PV(1+r)nFV = PV(1+r)^n
  3. What does the future value interest factor (1+r)n(1+r)^n represent?Answer: The growth multiplier applied to present value over nn periods.
  4. With present value and time held constant, what happens to calculated future value when a positive rate increases?Answer: Calculated future value increases.
  5. What should an investor conclude from a higher projected future value alone?Answer: It does not establish that the investment is safer or more suitable.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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