• Table of Contents • Introduction • 1-Time Value • 2-Risk/Return • 3-Accounting • 4-Securities • 5-Business • 6-Regulatory • Case Studies • Student Papers

## 1.2.1 Future Value of a Single Amount

The future value of a present amount can be computed by adding compound interest over a specified period of time. Compound interest is the amount by which the principal grows each period. Principal is the amount on which interest is paid.

Consider a simple example. What is future value of a \$200 savings account paying 8% interest compounded annually, after three years:

 Year Principal + Interest P x (1+%) Value at end of year 1 \$200 + .08 * \$200 \$200 * (1 + .08) \$216 2 \$216 + .08 * \$216 \$216 * (1 + .08) \$233.28 3 \$233.28 + .08 * \$233.28 \$233.28 * (1 + .08) \$251.94

Luckily, there is a simple formula for finding future value:

 PV = FVn / (1 + i)n PV the present value (or initial principal) FVn future value at the end of n periods i the interest rate paid each period n the number of periods

Example:

Using the attached future value table, or a calculator or spreadsheet, compute how much a 30-year government bond face amount \$10,000 at 8.5% interest (compounded annually) would pay at maturity?