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Objectivesunderstand the concepts and calculate:
 Future Value (or compound amount) of a single amount
 Present Value of a single amount
 Future Value of an annuity
 Present Value of an annuity
 Present Value of notes and bonds
Basic Concepts and Assumptions:
 Money invested today will grow to a larger amount at a later date (the future). The growth in the
money is called interest and it is periodically added to the original investment (principal) so that it
is treated as principal for future interest earning calculations. Because of the adding of each
period’s interest to the principal, each subsequent interest amount is larger than the previous. This
is the concept of compounding interest. Basically, the future value of an amount (principal) is
equal to the original principal plus the interest earned.
 As a result of the previous concept money in the future is equal to a smaller amount of money today
(the present). It is essentially the reverse of the above. To find out how much money you would
need today (present value) so that it accumulates to a given amount in the future (future value)
one would deduct the interest. But remember the interest has to be deducted using the same
concept of compounding. This deducting or taking away of interest is called “discounting”.
Basically, the present value of a future amount is equal to that future amount less the interest
discounted.
 Because simple interest calculations assume that the interest earned is not added periodically but is
added all at once at the end, the future value of an amount using simple interest would result is a
smaller future value. Similarly, the present value of a future amount at simple interest would be
larger than at compound interest because less interest would be deducted.
Method of Solving Problems:
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 Fall '08
 MENSAH
 Financial Accounting

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