 • 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?

Answer:

\$115,582.52. You can see how this was computed on the attached spreadsheet. Notice that the spreadsheet answer is more accurate than using the tables, which are accurate only to four decimal places and create round-off errors when interest rates or terms are not whole numbers.

 This page was last updated on: March 8, 2005