10.5 Simple Future and Present Values (Formulas)
Having done the foregoing work, it is plain to see that we can symbolically represent the mathematics using the following “language.”
Key:
The expression, or “factor,” (1 + R/p) n x p, may be used as a “multiplier” when compounding from present to future values and, in its reciprocal form, as a multiplier again when discounting from future to present values. You will find the factors, calculated out, in interest rate tables, truncated versions of which you will find on the pages following.
“R/p” means that if the annual interest rate (R) is 12% and the number of compounding periods (p) is 12 (i.e., monthly compounding) the periodic compound rate is .12 ÷ 12 = .01. After one year, the FV would be $1 (1.01)12 = $1.1268. (Notice that this compares with once–a–year compounding at 12%: $1 (1.12) = $1.12. The difference in Future Values is not trivial.