Finance: Future value and present value

Finance: Future value and present value

In this section, we will revisit the connection between mathematics and finance, but from a different perspective. We will see how a slight variation of the Compound interest formula can help us understand some of the core concepts in Finance – Future value and Present value.

Lessons

future value and present value: FV=PV(1+rn)nt { FV = PV (1+\frac{r}{n})^{nt}}

FV {FV} : Future Value
PV {PV} : Present Value
r {r} : Annual interest rate
t {t} : total time given in years
n {n} : number of times compounded in a year, if

Compound daily:

n = 365

Compound monthly:

n = 12

Compound quarterly:

n = 4

Compound semi-annually:

n = 2

Compound annually:

n = 1

  • 1.
    What is the future value of $30,000 which grows at an annual interest rate of 11%, compounded monthly, for three years?

  • 2.
    What is the present value of $15,000 sixteen months from now if the annual discount rate is 10%, compounded quarterly?