Money Value

# Money Value - Objectives-understand the concepts and...

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Objectives--understand 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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## This note was uploaded on 04/03/2012 for the course ACCT 272 taught by Professor Mensah during the Fall '08 term at Rutgers.

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Money Value - Objectives-understand the concepts and...

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