Future Value, Present Value, Interest Rates

What’s the future value formula

FV=PV(1+i)

What is compound interest also known as?

“interest on interest”

Whats the compound interest formula

FV_n=PV(1+i)ⁿ

^“n”: number of periods

Whats the rule of 72? Whats the formula

A easy way of determining how long it’ll take for a principal to double.

Formula: 72 / Interest rate

What’s the present value formula?

PV= FV / (1+i)

Whats the formula for the present value of a payment received “n” years in the future?

PV= FV_n / (1+i)ⁿ

What would cause the present value to be higher?

1. The higher the future value the higher the PV

2. There’s a shorter time period until payment

3. The lower the interest rate the higher the PV

how does present value change

• Doubling the FV of a payment without changing the time of the payment or interest rate doubles the present value

• The sooner the payment is made the more its worth

• Higher interest rates are associated with lower present values no matter size or timing of payment

• At any fixed interest rate an increase in time reduces its present value

What’re bonds?

A promise to make a series of payments on a specific future date

Whats the most common type of bond?

The coupon bond is the most common type of bond. The issuer is required to make annual payments called coupon payments. the interest that the borrower pays is the coupon rate. the date the bond is paid is the maturity date. the final payment is the principal / par value / face value of the bond.