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The Time Value of Money
I give you 100 dollars. You take it to the bank. They will give you 10% interest per year for 2 year.
Determine Future Value Compounded Annually What is the future value of $34 in 5 years if the interest rate is 5%? (i=.05)
Determine Future Value Compounded Monthly What is the future value of $34 in 5 years if the interest rate is 5%? (i equals .05 divided by 12, because there are 12 months per year. So 0.05/12=.004166, so i=.004166)
Determine Present Value Compounded Annually You can go backwards too. I will give you $1000 in 5 years. How much money should you give me now to make it fair to me. You think a good interest rate would be 6% ( You just made that number up). (i=.06)
O.K. so you give me $ 747.38 today and in 5 years I'll give you $1000. Sound fair?? You will get 6% interest on your money. Determine Present Value Compounded Monthly Here's that last one again, but with monthly compounding instead of annual compouding. (i equals .06 divided by 12, because there are 12 months per year so 0.06/12=.005 so i=.005)
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