1.2 Future Value

This section focuses on the computation of future and present values, under various assumptions. It introduces you to some terminology: interest, compound interest, principal, continuous compounding, annuities. It also provides you with some computational formulas and tables.

You should become comfortable making future value computations - whether there is one amount taken into the future for one period, or multiple periods or multiple amounts.

1.2.1 - Future value of a single amount

The future value of a present amount can be computed by adding compound interest over a specified period of time. Compound interest is the amount by which the principal grows each period. Principal is the amount on which interest is paid. (More 1.2.1>>)

1.2.2 - Compunding more frequently than annually

Interest can be computed more frequently than annually. With this greater precision, banks (for example) can offer accounts that can be withdrawn in the middle of the year. But it can also be misleading if the interest rate on a consumer loan states the annual percentage rate (APR) when interest is actually compounded more frequently than annually. (More 1.2.2>>)

1.2.3 - Future value of an annuity

Until now we have been assuming that future values arose from only one initial investment. What happens when there is a stream of multiple investments? An annuity describes a stream of equal annual cash flows. (Annuities come in two flavors: a stream of outflows invested to produce future returns or a stream of inflows of investment returns.) (More 1.2.3>>)