explain the concepts of compounding and discounting(Time Value of Money), and give practical examples of each.
The term compounding can be defined as future value of persent investment. Future value is an amount you will reccived after a particular period by investing today. In compounding, both principal and interest earn returns. Since money will grow continuously.
The following formula can be used for future value/compounded value.
Future amount =Investment*(1+i)n
where i= rate of interest
n = number of compounding
Exemple
Mr. David has deposit $50000 in bank for 2 year. Bank gives interest rate 10% par annum compounded yearly. What amount will Mr. David reccived after 2 year.
Single amount deposit =$50000
rate of interest(i) =10%
number of compounding(n) =2
Future amount =$50000(1+0.10)2
=$50000*1.10*1.10
=$60,500
Hence $50,000 deposit by Mr. David today, will give future value of $60,500 after 2 year by compounding.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
