You are on page 1of 2

Future Value

What is 'Future Value - FV'

The future value (FV) is the value of a current asset at a specified date in the future based on
an assumed rate of growth over time.

If, based on a guaranteed growth rate, a $10,000 investment made today will be worth $100,000 in
20 years, then the FV of the $10,000 investment is $100,000. The FV equation assumes a
constant rate of growth and a single upfront payment left untouched for the duration of the
investment

Simple Annual Interest


The product of the principal amount multiplied by the periods interest rate.

Example:
ABC Corporation deposits P10,000 in a bank at 10% interest a year. One year later the
P10,000 will have grown to P11,000: P10,000 is principal and P1,000 is interest the amount of
interest is determined by multiplying the interest rate of 10% by the principal of P10,000 (0.10 x
P10,000 = P1,000). Thus, the value of a peso today can increase in the future because of the
interest.

Principal P10,000.00
Interest for year1 to 10%
(0.10 x P1,000 =P100.00) 1,000
Compound Interest
The interest paid on both the principal and the amount of interest accumulated in prior periods.
Example:
Now suppose that ABC Corporation leaves its P10,000 on deposit for 2 years in a bank
paying 10% annual interest at the end of the first year, the initial deposit becomes P11,000/ during
the second year, the firm will earn 10% on this P11,000, or additional P1,100 in interest. The firm is
earning interest on the changing balance. Hence, at the end of the second year, the firm will have
P12,100 in its account.

Balance at the beginning of year 2 P11,000.00


Interest for year 2 at 10%
(0.10 x P1,100 = P110.00) 1,100.00
Future value at the end of the year P12,100.00

The formula for the FV of an investment earning compounding interest is:


FV = I * ((1 + R) ^ T)

Future Value (With Intraperiod Compounding)

Compounding that occurs more than once a year is called intraperiod compounding. The
calendar period over which compounding occurs is called the compounding period. For example,
compounding may occur annually, semi-annually, quarterly, or monthly. When using intraperiod
compounding, the future value formula must be modified to reflect the number of times per year
compounding occurs, denoted by m.

= {1 + }

Example:

Instead of placing P1,000 in Atlanta Bank that pays 10% interest annually, the financial manager
decides to put the money in National Bank that pays 10% interest compounded semi-annually .
between the two banks, there would be a difference in the future value of your investment after one
year.
Atlanta Bank National Bank
Annual Compounding Semiannual Compounding
0.10
FV1 = (P1,000)(1+0.10)1 FV1 = (P1,000)(1+ 2 )(2)(1)
= (P1,000)(1.10) = (P1,000)(1.1025)
= P1,100.00 = P1,102.50

Now, Subtract P1,100 from P1,102.50 to find the difference in future values of P2.50. thus, more
interest is earned with semiannual compounding than with annual compounding.

Increase the frequency of the compounding period makes the future value grow more rapidly
because more interest is earned on the changing balance.

Questions:
1.) It is the interest paid on both the principal and the amount of interest accumulated in prior
periods.
a. Simple Interest c. Compound
b. Compound Interest d. Interest
2.) Defined as the cost of using money overtime.
a. Interest c. Principal
b. B. Time value of money d. Interest expense
3.) The cost of interest excess resources to the borrower for the use of the money.
a. Interest c. Interest Expense
b. Interest Revenue d. Time value of Money

You might also like