Hi again!!
Future Value is the amount of money that an investment made today (the
present value) will grow to by some future date.
The future value of an amount of money invested at interest rate I for
one year is given by:
FV = PV*(1 + i)
where:
FV = future value
PV = present value
i = Interest Rate Per Period
If the resulting principal and interest are re-invested a second year
at the same interest rate, the future value is given by:
FV = PV*(1 + i)*(1 + i) = PV*(1 + i)^2
In general, the future value of a sum of money invested for t years
with the interest credited and re-invested at the end of each year is:
FV = PV*(1 + i)^n
Where:
FV = future value
PV = present value
i = Interest Rate Per Period
n = Number of Compounding Periods
Interest Factor:
The term (1 + i)^n is the future value interest factor and it is
useful for using tables to facilitate calculations, its value is
function of the rate (i) and number of periods (n). So:
FV = PV * Interest Factor(i,n) .
For references see:
"Future Value" at NetMBA:
http://www.netmba.com/finance/time-value/future/
"Compound Interest and Future Value (FV)":
http://www.olympic.ctc.edu/class/tlieu/03-02/summary-ch12-1.htm
"Lookup Tables":
http://www.olympic.ctc.edu/class/tlieu/03-02/tables-ch12.htm
"USING FUTURE VALUE AND PRESENT VALUE TABLES WHEN THE NUMBER OF
PERIODS EXCEEDS THOSE IN THE TABLES":
http://www.swcollege.com/vircomm/gita/gita06-3_main.html
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For this problem:
PV = $2,000
i = 8%/4 = 2% = 0.02
n = 10 years * 4 Periods/year = 40 Periods.
Interest Factor(i,n) = (1 + 0.02)^40 =
= 1.02^40 =
= 2.208
FV = PV * Interest Factor(i,n) =
= $2,000 * 2.208 =
= $4,416
After 10 years you will have in your account $4,416 .
I hope that this helps you. Feel free to request for a clarification
if you need it.
Regards.
livioflores-ga |
