Future value

Definition

Future value is the amount of money an investment will grow to over a period of time at a given interest rate. It reflects the value of a current asset at a future date based on expected growth.

5 Must Know Facts For Your Next Test

1. Future Value accounts for the interest earned over time, which can be compounded annually, semi-annually, quarterly, monthly, or daily.
2. The formula for calculating future value in case of compound interest is FV = PV * (1 + r/n)^(nt), where PV is present value, r is annual interest rate, n is number of compounding periods per year, and t is the number of years.
3. Annuities and uneven cash flows require different methods for calculating future values compared to single lump-sum payments.
4. Understanding future value helps in comparing investment options and assessing the potential growth of savings or investments.
5. Inflation can impact future value by diminishing the real purchasing power of money received in the future.

Review Questions

• What factors are considered when calculating the future value using compound interest?
• How does the frequency of compounding affect the future value of an investment?
• Why is understanding future value important when evaluating investment opportunities?

Related terms

Present Value: The current worth of a sum that is to be received in the future, discounted at a specific interest rate

Compound Interest: Interest calculated on both the initial principal and also on the accumulated interest from previous periods

Annuity: A series of equal payments made at regular intervals over a specified period