FINA UNIT 5 review

Explain how future dollar amounts are calculated using a single-period scenario

If you invest $1,000 for one year and that investment generates 5% interest, your investment will be worth $1,050 at the end of one year.

•Take $1,000 and multiply it by 1.05 = $1,050

Describe the impact of compounding

Explain how future dollar amounts are

calculated

Explain how future dollar amounts are

calculated

Explain how present dollar amounts

are calculated

Describe how discount rates are

calculated

Describe how growth rates are

calculated

Illustrate how periods of time for

specified growth are calculated.

Use a financial calculator and Excel

to solve TVM problems

Use a financial calculator and Excel

to solve TVM problems

Explain how the time value of money

can impact your personal financial

goals

Explain how the time value of money

is related to inflation

Explain how the time value of money

is related to financial risk

Explain how compounding period

frequency affects the time value of

money

Explain how compounding period

frequency affects the time value of

money. (cont.)

Summary

Key Terms

Review Questions

1. All other things being the same, would you prefer a bank account that

compounds interest quarterly or one that compounds interest semiannually?

You would prefer a bank account that compounds interest quarterly.

The more frequently interest is compounded, the larger the future value of your money. Quarterly compounding calculates and adds interest to your balance four times a year, whereas semiannual compounding only does so twice a year. Because you earn "interest on your past interest" more frequently with quarterly compounding, your total return will be higher.

2. Briefly describe the concept of future value within the context of the larger

overall concept of the time value of money.

Future value represents the exact amount a current sum of money will grow into over a specific period of time at a given interest rate.

Within the broader framework of the time value of money—the principle that a dollar today is worth more than a dollar tomorrow due to its earning capacity—future value is the calculation that measures this growth. It quantifies exactly how much your present money will be worth at a specific future date once compounding interest is applied.