How is compound interest computed? What is a future value? What is a p
QUESTION
How is compound interest computed? What is a future value? What is a present value?
To calculate the value of a sum of money at a future date, compounding technique is used. Using compounding, FV = PV*(1 r)^t; where, FV is the Future Value, PV is the Present Value, r is the interest rate per compounding period and t is the number of compounding periods. Compound interest is the total interest charged during the period. It is calculated by deducting the PV from the FV i.e. Compound interest = FV-PV.Future value is the worth of a sum of money at a future date. Dollar 1 today is not same as Dollar 1 received after a year. This change in the worth of money is due to the concept of the time value of money. To calculate future value compounding¦
nique is used as shown above.Present value is the current worth of a sum of money received at a future date. To calculate present value, a technique called discounting is used. Using discounting, present value = future value/(1 r)^t. Thus, ideally, Present value and future value are mirror images of each other, which depict inverse relationships. When we compound, we move forward in time and when we discount, we move backward in time.
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