Question

Future value calculations to estimate the funds needed to meet a goal take compounding into account.

true

false

Answer 1

The answer : True

Compounding is the process whereby interest is added to an existing amount as well as to interest already paid. Compounding can thus be understood as interest on interest—the effect of which is to magnify returns to interest over time, the so-called "miracle of compounding.

In simpler words, compounding means the multiplication of money by a certain rate.

Now, future goals require money. The best way to meet future funding requirements is to invest money in a planned manner so that the earning (in the form of interests, coupon payments, capital gains) can be used to fund requirements. This involves compounding because a certain amount of money today will be worth less in future if not compounded according to inflation, risk undertaken and other factors.