Question

How is compound interest computed? What is a future value? What is a

present value?

Answer 1

Compound interest is the interest that includes interest on the interest cost over the time period. When interest on interest cost is added to normal interest its called compound interest.

The formula to calculate compound interest is as below:

Compounded value of investment = Intial investment(1 + r/n)^t

r is the rate of interest. n is the number of times compounding is done and t is the number of years.

Compounded value minus the initial investment gives us the compound interest.

Future value is nothing but the compounded value. It is the value to which an investment would grow upto in a certain number of years at a pre defined rate.

Future Value = Present value(1+r)^n

where n is the number of years and r is the rate of interest.

Present value is the discounted value of an amount that is to be received after a certain period of time. Discounting is done at a given rate of interest at which investment is made.

Present value = Future value/(1+r)^n