What is the Future Value of an annuity?
The value of a group of repeated periodic payments at a certain date in the future, assuming a specific rate of return, or discount rate, is generally known as the future value of an annuity. The rate is directly proportional to the investment, so the higher the rate, the higher the future value of an annuity.
Effect of Compounding on Future Value:
The number of compounding periods can have a radical impact on the TVM calculations. Taking the $10,000 example, if the amount of compounding periods is increased to quarterly, monthly, or daily, the ending future value calculations are:
Example of Quarterly Compounding:
FV = $10,000 x (1 + (10% / 4) ^ (4 x 1) = $11,038
Example of Monthly Compounding:
FV = $10,000 x (1 + (10% / 12) ^ (12 x 1) = $11,047
Example of Daily Compounding:
FV = $10,000 x (1 + (10% / 365) ^ (365 x 1) = $11,052
This shows TVM rest not only on the interest rate and time horizon but also on how many times the compounding calculations are enumerated each year.
What is the future value of money?
Future value is the value of an asset or investment at an anticipated time. It measures the sum of cash that will be its worth at a certain time in future, assuming a particular rate of interest, or a rate of return. Its value is multiplied by the accumulation function.
What is the future value of loan balance?
The Future Value of Loan Balance governs the final value of a loan after payments have been made, at regular affluence, evaluating a regular rate of interest, compounded at payment dates.