TERM 1
future value
DEFINITION 1
refers to the amount of money an investment will grow to
over some period of time at some given interest rate. future
value is the cash value of an investment at some time in the
future.
TERM 2
investing for more than one period
DEFINITION 2
what will you have after two years, assuming interest rate
does not change? if you leave 110 in the bank, you earn 110
times. 1 equals 11 in interest during the second year, so you
have 110 plus 11 equals 121.100 principal10 in interest you
earn first year10 you earn int he second year 120.
TERM 3
compounding
DEFINITION 3
the process of leaving your money and any accumulated
interest in an investment for more than one period, then
reinvesting the interest. it means earning interest on
interest.
TERM 4
simple interest
DEFINITION 4
interest not reinvested. interest is earned each period only
on the original principal.
TERM 5
interest on interest example
DEFINITION 5
121 future value=110 times 1.1(100 t imes 1.1) times 1.1100 times
(1.1 times 1.1)100 times 1.1 squared1 00 times 1.21in two years
we invest 121 for one period at 10 pe rcent. we end up with 1.1 for
eveyr dollar we invest or 121 times 1. 1 equals 133.1133.1=121
times 1.1(110 times 1.1) times 1.1(100 times 1.1) times 1.1 times
1.1100 times(1.1 times 1.1 times 1.1)1 00 times 1.1 to the 3
power100 times 1.331future value=1 dollar plus(1 plus r) to the t
power. future value of interest facto r.
