Principles of Finance · free preview
Future Value and Present Value
Future value compounds a present amount forward at an interest rate, present value discounts a future amount back, and the two operations are inverse, with the number of compounding periods and the rate doing all the work.
1. Future value, compounding forward
Future value, compounding forward
2. Present value, discounting back
Present value, discounting back
3. Solving for the pieces
Solving for the pieces
4. The two levers
The two levers
5. Single-period growth
A deposit of 1,000 dollars earns 4 percent for one year. What is the future value, and what does it consist of?
6. Compounding's signature
Why does a 1,000 dollar deposit at 4 percent grow to 1,081.60 after two years rather than 1,080?
7. Computing a ten-year future value
What is the future value of 1,000 dollars at 4 percent annual compounding for ten years?
8. Present value as the inverse
A bond promises 1,480.24 dollars exactly ten years from now, and your discount rate is 4 percent. What is that promise worth today?
9. The Rule of 72
At an 8 percent annual rate, the Rule of 72 says money doubles in about how many years?
10. Rate sensitivity of present value
Why do present values fall especially sharply when the discount rate rises?
11. The growth factor's parts
In the future value formula , what letter names the interest rate per period? Write the letter.
12. The backward operation
What two-word term names the operation of translating a future amount into today's value at a discount rate? Answer in lowercase.
13. The quick doubling rule
What Rule of number approximates doubling time as that number divided by the rate percent? Write the number.
14. The compounding exponent
In , what letter names the number of compounding periods? Write the letter.
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