Unformatted text preview: rt by considering the simplest case, a singleperiod investment.
√Investing For a Single Period: Suppose you invest $100 in a savings account that pays 10 percent interest per year. How
much will you have in one year? You will have $110. This $110 is equal to your original
principal of $100 plus $10 in interest. We say that $110 is the future value of $100
invested for one year at 10 percent, meaning that $100 today is worth $110 in one year,
given that the interest rate is 10 percent. In general, if you invest for one period at an interest rate r, your investment will grow to (1
+ r) per dollar invested. In our example, rips 10 percent, so your investment grows to 1 +
.10 = 1.10 dollars per dollar invested. You invested $100 in this case, so you ended up
with $100 x1.10 = $110.
√ Investing For More Than One Period: Consider your $100 investment that has now grown to $110. If you keep that money in
the bank, what will you have after two years, assuming the interest rate remains the
same? You will earn $110 x.1...
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