Future Value Of A Single Amount
Future Value is the amount of money that an investment made today (the present value) will grow to by some future date. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate.
The relationship between the future value and present value can be expressed as:
Example: You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually. How much will you have 5 years from now if you make no withdrawals?
PV = 10,000
FV = 10,000 (1 + .06)5 = 10,000 (1.3382255776) = 13,382.26
Example 2: Another financial institution offers to pay 6% compounded semiannually. How much will your $10,000 grow to in five years at this rate?
Interest is compounded twice per year so you must divide the annual interest rate by two to obtain a rate per period of 3%. Since there are two compounding periods per year, you must multiply the number of years by two to obtain the total number of periods.
PV = 10,000
FV = 10,000 (1 + .03)10 = 10,000 (1.343916379) = 13,439.16
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