The time value of money is a financial concept that focuses on the idea that a dollar today will be worth more in the future. There are two key time value concepts: present value and future value. Looking at future value, the concept is that an amount in hand today will grow if it earns a specific rate of interest over a given period of time. This growth in value occurs not just because of the rate of interest being earned each year but also because that earned interest compounds. In other words, the interest earned in year one is added to the principal in year two, and interest is earned on this new principal balance; this continues through the set period of time. Work through the following scenario to understand future value and the concept of compounding interest. You have an eccentric aunt who has promised to deposit $7,125 in a savings account in your name. She has stated that you will not have access to the money for three years but that the money will be earning 7% interest. At the designated future date, the principal and interest will be yours to purchase a new car. First gather the relevant data by completing the following table. Present Value: Period: Rate of Interest: Future Value Factor: Next use the following table of future value factors or your financial calculator to calculate the future value of this money in three years. Period 1% 2% 3% 4% 5% 6% 7% 8% 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.020 1.040 1.061 1.082 1.103 1.124 1.145 1.166 1.030 1.061 1.003 1.125 1.158 1.191 1.225 1.260 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 2 3 + 6 7 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.460 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 The account will have a balance of in three years (rounded to two decimal places).
The time value of money is a financial concept that focuses on the idea that a dollar today will be worth more in the future. There are two key time value concepts: present value and future value. Looking at future value, the concept is that an amount in hand today will grow if it earns a specific rate of interest over a given period of time. This growth in value occurs not just because of the rate of interest being earned each year but also because that earned interest compounds. In other words, the interest earned in year one is added to the principal in year two, and interest is earned on this new principal balance; this continues through the set period of time. Work through the following scenario to understand future value and the concept of compounding interest. You have an eccentric aunt who has promised to deposit $7,125 in a savings account in your name. She has stated that you will not have access to the money for three years but that the money will be earning 7% interest. At the designated future date, the principal and interest will be yours to purchase a new car. First gather the relevant data by completing the following table. Present Value: Period: Rate of Interest: Future Value Factor: Next use the following table of future value factors or your financial calculator to calculate the future value of this money in three years. Period 1% 2% 3% 4% 5% 6% 7% 8% 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.020 1.040 1.061 1.082 1.103 1.124 1.145 1.166 1.030 1.061 1.003 1.125 1.158 1.191 1.225 1.260 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 2 3 + 6 7 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.460 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 The account will have a balance of in three years (rounded to two decimal places).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The time value of money is a financial concept that focuses on the idea that a dollar today will be worth more in the future. There are two key time
value concepts: present value and future value. Looking at future value, the concept is that an amount in hand today will grow if it earns a specific
rate of interest over a given period of time. This growth in value occurs not just because of the rate of interest being earned each year but also
because that earned interest compounds. In other words, the interest earned in year one is added to the principal in year two, and interest is earned
on this new principal balance; this continues through the set period of time.
Work through the following scenario to understand future value and the concept of compounding interest.
You have an eccentric aunt who has promised to deposit $7,125 in a savings account in your name. She has stated that you will not
have access to the money for three years but that the money will be earning 7% interest. At the designated future date, the principal
and interest will be yours to purchase a new car.
First gather the relevant data by completing the following table.
Present Value:
Period:
Rate of Interest:
Future Value Factor:
Next use the following table of future value factors or your financial calculator to calculate the future value of this money in three years.
Period 1% 2% 3% 4% 5% 6% 7% 8%
1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080
1.020 1.040 1.061 1.082 1.103 1.124 1.145 1.166
1.030 1.061 1.003 1.125 1.158 1.191 1.225 1.260
1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360
2
3
+
6
7
1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.460
1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587
1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714
The account will have a balance of
in three years (rounded to two decimal places).
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