Introduction to the future value of money. Under the concepts of the time value of money, you can determine the future value of an amount invested today that will earn a given interest rate over a given amount of time. This technique can be used to calculate the future value of: (1) a single receipt or payment made
(2) a series of receipts or payments.
Lexi and Luke are sitting together, with their notebooks and textbooks open, at a coffee shop. They've been reviewing the latest lecture from Dr. Thibodeaux's financial management class by asking each other questions Today's topic addressed the calculation of future values for both simple and compound interest-earning accounts. Complete the missing information in the conversation that follows. Round your final answer to all computations to two decimal places. However, if you compute any interest factors as an intermediate step in your calculations, round them to four decimal places.
Lexi So, why is it important to be able to calculate the future value of some amount invested?
Luke First, remember that the amount invested is usually called maturity payment and the amount earned during the investment period is calledinterest. It is important to be able to calculate a future value so that you can know in advance what a given amount of principal will be worth after earning a specified interest rate for a known
Lexi OK, I understand that, and I know the amount of principal invested today can be called the value of the investment, whereas the amount realized after the passage of t period of time is called its value. But what causes the present and future values to be different values?
Luke Two things cause the present and future values to be different amounts. First, the earned during the investment period causes the future value to be greater than, equal to, or less than the present value. Second, the method used to calculate the interest earned-that is, whether the account pays interest-determines the.