Future Value

1A. the process for converting present values into future values is called?

• Compounding
• Discounting

1B. this process requires knowledge of the values of 3 of 4 time-value-of-money variables. Which of the following is NOT one of these variables?

• The interest rate (R) that could be earned by invested funds
• The inflation rate indicating the change in average prices
• The duration of the investment (n)
• The present value (PV) of the amount invested

2. All other things being equal, the numerical difference between a present & future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the graph corresponds to an interest rate: 0%, 11% or 22%. Identify the rate the goes with each line.

Please look at the attached file for the picture

2A = 0%, 11% or 22% 2B = 0%, 11% or 22% 2C = 0%, 11% or 22%

3. Investments & loans base their interest calculations on 1 of 2 possible methods: The ___A___ interest & ___B___ interest methods

• Choices for A is which? Complex or Simple
• Choices for B is which? Uncomplicated or Compound

Both methods apply 3 variables, the amount of principal, interest rate & the investment or deposit period-to the amount deposited or invested in order to compute the amount of interest. However, the 2 methods differ in their relationship between variables. Assume that the variables r, n, & PV represent the interest rate, investment or deposit period, & present value of the amount deposited or invested, respectfully. Which equation best represents the calculation of a future value (FV) using:

4A. Compound interest?

• FV = PV x (1+r)ⁿ
• FV = (1+r)ⁿ /PV
• FV = PV + (PV x r x n)

4B. Simple Interest?

• FV = PV + (PV x r x n)
• FV = PV x r x n
• FV = PV x (PV x r x n)

5. Identify which statements are TRUE & which are FALSE

A. The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. (T/F)

B. All other factors being equal, both the simple & compound interest methods will NOT generate the amount of earned interest by the end of the 1^st year. (T/F)

C. After the end of the 2^nd year & all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest. (T/F)

6. Sarah is willing to invest $30K for 3 years & is an economically rational investor. She?s identified 3 investment alternatives (L, M & P) that vary in their method of calculating interest & in the annual interest rate offered. She can only make 1 investment in the 3 year period. Complete the following table by inserting the Expected Future Value & indicate whether Sarah should or should not invest in each.

			Make Investment
Investment	Interest Rate & Method	Expected Future Value	Yes or No
L	9% compound interest	???
M	8% simple interest	???
P	15% compound interest	???