3. Future value The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value This process requires knowledge of the values of three of The process for converting present Values into future values is called compounding four time value of money variables which of the following is not one of these variables? The present value (pv) of the amount deposited The interest rate (ty that could be earned by deposited fundi The trend between the present and future values of an investment The duration of the deposit (N) ctory All other things being equal, the numerical difference between a present and a future Value corresponds to the amount of interest earned during the deposit or investment period. Each time on the following graph corresponds to an interest rate: 0%, 12%, o 234 Identify the interest rate that corresponds with each line All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment penod. Each line on the following graph corresponds to an interest rate: 0%, 12%, or 23%. Identify the interest rate that corresponds with each line. VALUE Dolar tory 11 TI Line A: Line : Line C: v interest and the Investments and loans base their interest calculations on one of two possible methods: the interest methods. Both methods apply three variables the amount of principal, the interest rate, and the investment or deposit period to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables Assume that the vanabins 1, N. and PV represent the interest rate, investment or deposit parlod, and present value of the amount deposited or Invested, respectively Which equation best represents the calculation or a future value (FV) using: Compound interest story FV-PV + PV XIXN) FV-PVX ( 11) #PU (1+1) Simple interest? OFV-PVXIXN OFV = PV / (PV XIXN) OFV-PV + (PV XI XN) Identity whether the following statements about the simple and compound interest methods are true or False Statement True False All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest . Everything else held constant, an account that ears compound interest will grow more quickly than an otherwise identical account that earns simple interest Anter the end of the second year and all other factors remaining equal, a future Value based on compound interest will exceed a Tuture Value based on simple interest Yurt is willing to invest $45,000 for six years, and is an economically rational investor. He has identified three investment alternatives (X, Y, and 2) that vary in their method of calculating Interest and in the annual interest rate offered. Since he can only make one investment during the six year Investment period, complete the following table and indicate whether Yuri should invest in each of the investments. Note: When calculating each investment's future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar Investment Expected Future Value Make this Investment? Interest Rate and Method 11% compound interest 13% compound interest 134 simple interest
