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

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1- Future Value and CompoundingFuture Value:the amount an investment is worth after one or more periodsInvesting for a single periodIf you invest for one period at an interest rate of r, your investment will growto(1 + r) per dollar invested.In our example, r is 10 percent, so your investment grows to 1 + .10 = 1.1dollars 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 periodIf you invest for 2 yearso1st year: 100*(1+0.1) = 110\$o2nd year: 110*(1+0.1)= 121\$ has 4 parts100 \$ original10\$ earned in 1st year10\$ earned in 2nd year1\$ earned in 2nd year on the interest paid in the 1st year\$10*0.1Compounding: the process of accumulating interest on an investmentover time to earn more interestInterest on interest: interest earned on the reinvestment of previousinterest paymentsCompound interest:ointerest earned on both initial principal and the interest reinvested fromprior periodsoKeeps increasing because more and more interest builds up and thereis thus more to compoundSimple interest:ointerest earned only on the original principal amount investedoBe constant each year

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