Notes - Simple Present Future Value.docx - 1- Future Value...

1- Future Value and Compounding
Future Value : the amount an investment is worth after one or more periods
Investing for a single period
 If you invest for one period at an interest rate of r, your investment will grow
to
(1 + r) per dollar invested.
In our example, r is 10 percent, so your investment grows to 1 + .10 = 1.1
dollars per dollar invested.
 You invested $100 in this case, so you ended up with $100 × 1.10 = $110.”
 FV = PV * (1+r)
Investing for a more than one period
 If you invest for 2 years
o 1st year: 100*(1+0.1) = 110$
o 2nd year: 110*(1+0.1)= 121$ has 4 parts
 100 $ original
 10$ earned in 1st year
 10$ earned in 2nd year
 1$ earned in 2nd year on the interest paid in the 1st year
$10*0.1
 → Compounding : the process of accumulating interest on an investment
over time to earn more interest
 → Interest on interest : interest earned on the reinvestment of previous
interest payments
 → Compound interest :
o interest earned on both initial principal and the interest reinvested from
prior periods
o Keeps increasing because more and more interest builds up and there
is thus more to compound
 → Simple interest:
o interest earned only on the original principal amount invested
o Be constant each year