0.2 The Time Value of Money and Interest
For each of the following questions, assume you have $1 and that interest on it will be paid once, at the END of the stated period. What is the future value of each of the following? (If you had more than $1, the answer would be the appropriate multiple thereof.)
In other words, if given one dollar, how much money would you have if, as in question #1, you earn 5% for one year, and the interest is paid to you at the end of one year?
Try to create a symbolic formula, which may be employed, for any similar problem.
- 5% interest, paid once a year, at the END of the year, for one year.
- Same as above, but at 10%.
- Same as above, but for two years.
- 10% interest, twice a year, for one year.
- Same as above, but for two years.
- What happens to future values as interest rates (“R”), the number of years (“n”), and compounding frequency (“p”) increase?
- For each of the above questions, what would be the present value of $1 to be received at the end of the stated periods?
- Is this a realistic question to ask? How might this possibility actually happen?
Question #6: The Three Commandments of TVM
| If Interest Rates Rise | Future Value | Present Value |
| Annual Interest Rate (R) | Rise | Decline |
| Number of Years (N) | Rise | Decline |
| Compounding Periods (P) | Rise | Decline |
The opposite will occur if R, N, and / or P declines.
An investment in knowledge pays the best interest.
-Benjamin Franklin