Question 1

What is the future value of money?

Accepted Answer

Future value (FV) is the value of a current asset or series of payments at a specified date in the future, assuming a certain rate of growth or interest. It answers the question: 'How much will my money be worth in X years?' Future value accounts for the time value of money — the principle that money available today is worth more than the same amount in the future due to its earning potential.

Question 2

What is the difference between ordinary annuity and annuity due?

Accepted Answer

An ordinary annuity makes payments at the end of each period (like most loan payments), while an annuity due makes payments at the beginning of each period (like rent). An annuity due results in a slightly higher future value because each payment has one extra period to earn interest. The future value of an annuity due equals the ordinary annuity FV multiplied by (1 + r).

Question 3

What is the future value formula?

Accepted Answer

The future value formula combines a lump sum and periodic payments: FV = PV(1+r)^n + PMT x [((1+r)^n - 1) / r], where PV is present value, r is the interest rate per period, n is total number of periods, and PMT is the payment per period. For annuity due, multiply the payment portion by (1+r) to account for payments made at the beginning of each period.

Question 4

How do compounding periods affect future value?

Accepted Answer

More frequent compounding periods (monthly vs. annually) result in a higher future value because interest is calculated and added to the principal more often. For example, $10,000 at 6% for 10 years grows to $17,908 with annual compounding but $18,194 with monthly compounding — a difference of $286. The effect becomes more pronounced with higher rates and longer time periods.

Question 5

What is a good rate of return to use for future value calculations?

Accepted Answer

The rate depends on your investment type. Savings accounts may earn 4-5% APY, bonds 3-5%, and stock market investments have historically returned about 10% (7% after inflation). For conservative planning, use a lower rate. Always consider inflation — a 7% return with 3% inflation gives a real return of about 4%.

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