Finance CH9

What is the relationship between present value and future value?

The future value is the amount an investment is expected to grow to at some future date. Present value is the current value of future expected cash flows discounted at the appropriate discount rate. Future and present values are used in calculating either's value.

Present Value

today's value of expected future cash flows discounted at the appropriate discount rate.

Simple Interest

Earning interest only on the original deposit in the account, when an investment pays interest only on the original principal

How does a single investment grow?

Compound Interest

What kind of interest is better for the investor?

Compound Interest

Compound Interest

When an investment earns interest on both the original principal and the accumulated interest rate, or interest earned on interest

Future Value

amount of money an investment will grow to by earning a certain rate of return over time.

Compounding

going from a known value today, to an expected but unknown value in the future. Compounding-multiply, over a number of time periods, by number greater than 1.0.

Discounting

going from an expected future value to a present value. Discounting-multiply, over a number of time periods, by number less than 1.0.