In: Finance
1) What are the four basic variables of the time value of money equation?
2) What does the term compounding mean?
3) What happens to a future value as you increase the interest (growth) rate?
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1. Time value of money equation Formula:
FV= PV*(1+r)^n
The basic 4 variables are:
FV = future value.
PV = present value.
r= interest rate for the period.
n = number of periods.
2. Compounding meaning: It means earnings from interest on Interest i.e the interest earned on capital is reinvested to earn Interest on Interest.
3. As per Time value of money equation Formula:
FV= PV*(1+r)^n
The future value directly proportional to the interest rate. The future value increases as the interest rate increases.