Suppose the interest rate is 10 percent. If 100 is invested...

Suppose the interest rate is 10 percent. If $\$ 100$ is invested at this rate today, how much will it be worth after one year? After two years? After five years? What is the value today of $\$ 100$ paid one year from now? Paid two years from now? Paid five years from now?

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Key Concepts

Time Value of Money

This is the fundamental financial principle stating that a sum of money has a different value today compared to the same sum in the future due to its potential earning capacity. It underlines the idea that money available at present is worth more than the same amount in the future because it can be invested to earn interest or returns.

Compound Interest

Compound interest refers to the process where the interest that accrues on an initial principal also earns interest over time. This means that interest from a previous period is added to the principal, so the amount on which future interest is calculated increases, leading to exponential growth over multiple compounding periods.

Future Value

Future value is a calculation of how much an investment made today will grow to at a specified interest rate over a given period of time, assuming that interest is compounded. It accounts for the accumulated interest over time, projecting the amount available at a future date.

Present Value

Present value is the current worth of a future sum of money or stream of cash flows given a specific rate of return. It involves discounting the future amount back to the present using an appropriate interest rate, reflecting the principle that money available in the future is worth less than the same amount today.

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