Chapter 5
The future value (FV) of an investment is what the investment will be worth after earning interest for one or more time periods.
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The process of converting the initial amount into a future value is called discounting
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The term (1+i) is the present value interest factor, often called simply the present value factor, for a single period, such as one year.
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The time value of money implies that a dollar received today is worth less than a dollar to be received in the future because funds received today cannot be invested to earn a return.
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The time value of money implies that the further in the future you receive a dollar, the more it is worth today
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The time value of money is based on the idea that most people prefer to consumer goods tomorrow rather consume similar goods today.
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The value of a dollar invested at a negative interest rate grows over time
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There is no trade-off between money today and money at some future date and it does not depend the rate of interest you can earn by investing.
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With a higher rate on an investment, less money is accumulated for any time period
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Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).
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Compound interest includes not only simple interest but also interest earned on the reinvestment of previously earned interest, the so-called interest earned on interest.
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Computationally, the present value factor is the reciprocal of the future value factor, or 1/(1+i)
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If the discount rate increases, then the present value of a potential investment would fall
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Money has a time value because a dollar in hand today is worth more than a dollar to be received in the future.
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The concept of compounding is not restricted to money, and any number that changes over time, such as the population of a city, changes at some compound growth rate.
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The earnings from compounding drive much of the return earned on a long-term investment because the longer the investment period, the greater the proportion of total earnings from interest earned on interest.
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The future value in three years of $5000 invested today at a rate of 10 percent is $6655
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The growth in the future value of an investment over time is not linear, but exponential
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The longer the time period that funds are invested, the greater the future value
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The present value factor increases as the number of period decreases. The present value factor = 1/(1+i)
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The present value is simply the current value of a future cash flow that has been discounted at the appropriate discount rate.
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The present value of a dollar becomes smaller the father into future dollar is to be received
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The principal is the amount of money on which interest is paid
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The principal is the amount of the investment.
true
The term (1+i) is the future value interest factor, often called simply the future value factor, for a single period, such as one year.
true
The time value of money implies that a dollar received today is worth more than a dollar received tomorrow
true
The value of a dollar invested at a positive interest rate grows over time
true
With a higher interest rate on an investment, more money is accumulated for any time period.
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The present value factor decreases as the number of periods decreases
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The present value is what the investment will be worth after earning interest for one or more period.
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The principal is the amount of interest earned each period.
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A dollar today is worth less than a dollar received in the future.
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Any number of changes that are observed over time in the physical and social sciences unfortunately do not follow a compound growth rate pattern and the future value formula cannot be used in calculating these growth rates.
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Compounding is the process by which interest earned on an investment is spent so that in future periods, interest is not earned on the interest previously earned as well as the original depreciation amount.
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Simple interest includes not only interest on interest but also interest earned on the reinvestment of previously earned interest, the so-called compound interest
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The earning from compounding does not effect the return on a long-term investment because the longer the investment period, the smaller the proportion of total earnings from interest earned on interest.
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The future value is simple the current value of future cash flow that has been discounted at the appropriate discount rate.
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The future value is the value today of a future cash flow
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The higher the discount rate, the higher present value of $1 for a given time period.
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The lower the interest rate, the faster the value of an investment will grow, and the larger the amount of money that will accumulate over time.
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